Wednesday, October 22, 2014

Inflation Rises Faster Than Expected In September Quarter

The headline price of Australian consumer goods and services printed slightly above forecasts in the September quarter and at the lower end of the Reserve Bank of Australia's target band of 2 to 3 per cent annual inflation. The consumer price index (CPI) data from the Australian Bureau of Statistics -- the key measure of inflation -- lifted by 0.5 per cent in the three months to September, bringing the annual rate to 2.3 per cent.

Economists surveyed by Bloomberg had forecast CPI would rise by 0.4 per cent for the quarter, for an annual rate of 2.3 per cent.

The annual consumer price index now stands at its lowest level in a year after touching the top of the central bank's 2-3 per cent target band three months earlier.

In its latest quarterly Statement on Monetary Policy, released in August, the RBA downwardly revised its inflation forecasts.

The RBA expected the CPI would rise 2 per cent in the year to December 31, a downward revision from 2.75 per cent estimated in May. For the next financial year to June 2015 the central bank forecast an inflation rate of 1.75 per cent to 2.75 per cent, down from its previous estimate of 2.25 per cent to 3.25 per cent.

However, underlying inflation which strips out volatile components and is the RBA's preferred measure, came in slightly below economists' forecasts.

The measure of underlying inflation, the trimmed mean, rose 0.4 per cent in the September quarter and 2.5 per cent over the year to September.

That compared with Bloomberg analysts' forecasts of a 0.5 per cent rise in the quarter and a 2.7 per cent lift over the year.

Inflation on tradeable goods rose by 0.3 per cent in the September quarter to be 2.0 per cent higher over the year. By comparison, inflation on non-tradeable goods rose by 0.5 per cent to be 2.4 per cent higher over the year.

The trimmed mean and weighted median measures of inflation were up by 2.5 and 2.6 per cent over the year.

The most significant price rises in the quarter were for food and non-alcoholic beverages, which grew 1.2 per cent in the quarter, and tobacco and alcohol prices, which spiked 1.1 per cent in the quarter.

The most significant price falls during the quarter were for electricity --down 5.1 per cent -- and automotive fuel -- down 2.5 per cent.

JP Morgan economist Tom Kennedy said the figures were in line with market expectations, though there was a surprising rise in fruit prices, which were up 15 per cent. He said it was surprising that the removal of the carbon tax didn't have a bigger impact on the figures.

"Electricity was a little bit better than we had expected, it fell five per cent but we were looking for a larger decline than that mainly because of the carbon tax repeal implications," Mr Kennedy said.

"But the unwinding of the carbon tax will take more than one quarter, so I'd expect to see some residual effect also in the fourth quarter."

Mr Kennedy said the low annual inflation rate will give the RBA flexibility when making interest rate decisions.

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Companies Should Be Paying More Tax

ONCE again, I saw Joe Hockey (ABC Insiders, October 12) defending this government’s spending cuts in order to ensure that we reduce the deficit and move into surplus.

I agree that we need to be well placed for future economic challenges.

I also agree that we do need to reduce our deficit and a move to surplus would be ultimately beneficial for our economy.

I also agree that we must spend within our means, but I absolutely challenge the methods of the Abbott government and the ongoing rhetoric about a so-called ‘budget emergency”.

First thing is that we have an economy of about $1.7 trillion with debt at something like $300 billion. Debt as a percentage of GDP is approximately 21 per cent.

Yes, less debt would be better, but this hardly equates to an emergency.

I work in the financial services sector and I can assure readers that we have international fund managers knocking on the door to buy Australian government bonds.

This is an indication of a robust economy, but the strength of our economy is indeed threatened buy draconian spending cuts.

We do not have an expenditure problem. We have a revenue problem.

This goes back to the days of the Howard government when mining revenue was incredibly strong.

The then treasurer, Peter Costello, did a good thing in setting up the Future Fund (this was critical during the global financial crisis as it assisted Wayne Swan in stimulating spending), but the bad thing Mr Costello did was to introduce tax cuts to all and sundry.

Yes, a good re-election strategy, but a poor one for long-term economic growth.

So what is the solution?

The solution, Mr Hockey, is to be brave. Mr Abbott, be a leader. Let’s begin by reviewing all fossil fuel subsidies (fossil fuel will one day be a thing of the past), increase company tax, review the Medicare Levy on higher income earners, review negative gearing tax breaks, review some components of the GST and review tax breaks on superannuation for higher income earners.

Mr Abbott, abolish the paid parental leave policy.

I am sure there are other areas that could be included, but I just wanted to name a few.

Again, our major problem is revenue, not debt.

For what it is worth, I run a company, I am a higher income earner and I take full advantage of the generous superannuation system by making contributions to the maximum limit.

Therefore, I would feel some pain, but I should as I can afford to do so.

How did I fare after the May budget? Extremely well as I was not asked to contribute more and I should have been.

I really feel for those on lower incomes and for those who have a genuine reliance on our social security system.

We need courageous leadership with a vision for the future.

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Tuesday, October 21, 2014

Rates To Stay Low Despite Housing Surge: RBA

THE Reserve Bank expects to keep official interest rates at rock bottom lows until well into next year to stimulate Australia’s lopsided economy, as rising global financial volatility bolsters the case for caution.

The minutes of the RBA’s October board meeting, released today, also showed members were concerned that increased competition among lenders could result in the issuing of riskier loans, leaving the economy exposed to sudden falls in house prices.

The central bank’s nine-member board, which has kept the official cash rate at a record low of 2.5 per cent since August last year, said interest rates for loans had edged lower in recent months as competition among lenders increased.

“In this context members discussed the importance of lender maintaining strong lending standards,” the RBA said.

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Australian Equities Market

In Australia, weekly consumer sentiment and September imports data is released. In China, economic growth & monthly economic data are released at 1pm AEDT. In the US, data on existing home sales is issued.


US Equities

US sharemarkets were recovered after early losses on Monday. The S&P 500 and Nasdaq advanced, but disappointing results from IBM kept the Dow under pressure. IBM slumped by 7.2% after third quarter earnings fell well short of expectations. IBM is looking to overhaul its business units. According to Thomson Reuters data 87 companies on the S&P 500 have reported quarterly earnings with 63.2% beating analyst expectations (in line with the last two decades). The Dow Jones initially fell by 120 points before recovering to close up by 19 points or 0.1 per cent with the S&P 500 index up by 0.9% while the Nasdaq rose by 57 points or 1.4%.

US treasury prices rose on Monday (yields lower) as weaker European equities and speculation that the Federal Reserve may delay rate hikes supported demand for safe-haven government bonds. US 2 year yields fell by 3 points to 0.355% while US 10 year yields lost 1 points to 2.187%.

Major currencies rose against the greenback over European and US sessions on Monday. The Euro rose from lows near US$1.2735 to highs near US$1.2810, ending US trade near US$1.2805. The Aussie dollar rose from lows near US87.50c to highs near US87.95c ending the US session near US87.85c. And the Japanese yen strengthened from 107.35 yen per US dollar to JPY106.80, ending US trade near JPY106.85.

World oil prices eased on Monday, as concerns about over supply and sluggish demand pushed oil back towards last week's four-year low. Traders waited on the OPEC meeting on November 27 with speculation of a potential cut in OPEC oil production. Brent crude fell by US80c to US$85.35 a barrel while the US Nymex crude price fell by 4c to US$82.71 a barrel.

Base metal prices were mixed on the London Metal Exchange on Monday. Nickel led the declines down 2.1% with zinc (down 1.6%) and copper (down 1.2%) also weaker. On the flip side Tin managed to eke out a 0.3% gain. Gold rose on Monday with the Comex gold futures quote up by US$5.70 an ounce or 0.5% to US$1,244.70 per ounce. Iron ore was up by US60c on Monday or 0.7% to US$81.20 a tonne.


Local Markets Update.

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Australians Should Work Longer: RBA

Assistant governor of the Reserve Bank of Australia, Christopher Kent, has called on Australians to work later into their lives, in a bid to combat productivity loss associated with ageing populations.

He also said the RBA's current low interest rate policy is assisting Australia make the transition to an economy with an ageing population.

Speaking to the Leading Age Services Australia National Congress, Mr Kent said while monetary policy tended to focus on the near-term outlook over the next few years, the RBA needed to account for longer-term structural changes.

"We need to distinguish between shorter-term business cycle influences and longer-term structural forces," Mr Kent said, pointing out that RBA policy needed to address both shorter and longer term issues.

He said the noticeable decline in labour participation owed much to the usual response of discouraged workers, both young and old, to subdued labour market conditions, which would likely unwind as conditions improve.

"But some of the decline also reflects the increasing effect of ageing on labour force participation."

He said with inflation expected to remain consistent with the 2 to 3 per cent medium-term target, monetary policy is currently configured to support growth in demand.

Mr Kent said it made sense to have people work later into their lives, in order to account for a productivity loss as the aging population becomes less inclined to risk-taking and innovation.

"Rising longevity will provide us with the ability and willingness to work later into life, without necessarily implying a change in the share of our lifetimes we spend in retirement," he said.

"This will allow us to bolster participation, savings and reduce the burden on the public purse."

Australia is one of many countries who are facing the looming problem of having a lower proportion of people in the workforce compared to those who are at retirement age.

One of the ways to combat this is the federal government's decision a few years ago to push the retirement age to 67 years old, from 65.

Mr Kent said longer life spans and longer working lives might result in people taking more risks with their careers, like starting up new businesses.

"They might be more willing to do so knowing that they would have more productive years to take advantage of a successful business," he said.

"In short, 40 may be the new 30 when it comes to comparing the willingness of the current generation to take on risk compared with those born only a few decades ago."

Longer life spans provide opportunities and incentives to gain more education or learn a trade, and to do so later into life," he said.

"A longer working life raises the life-time returns to advanced education and training, thereby providing the incentive to do more of it."

Dr Kent said it made sense that the retirement age was being pushed back because people were living longer, were much healthier later in life and would have longer retirements.

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