Sizzler

Construction, reaction, rotation

Brisbane's apartment construction cycle is clearly on its last legs now, with commencements falling away sharply. 

But all those new people arriving from down south or overseas also need supermarkets, shops and shopping malls, and schools, and six star hotels, and service stations, and sausage sizzles. 

This we're now moving into a different phase, with a number of major infrastructure projects and transport upgrades getting underway.

Less well publicised, there's also some significant investment in commercial development around the traps. 

And, yes, that includes the odd new Bunnings.

In the words of the old infomercials, Brisbane is a city on the move.

More records tumble at Port Hedland

Alright, China

China is in a rush to get rich before it gets old, with its GDP growth still expected to be above 6½ per cent in the second half of calendar year 2018. 

Although China has a pressing demographic challenge and its population is forecast to stop growing significantly in the not-too-distant future, urbanisation continues apace with the urban population projected to surge to around 1 billion by the end of the next decade. 

Back in 2010 it was estimated in some parts that China had up to 64 million vacant homes as images emerged of 'ghost' cities. 

Eight years on, the latest residential indicators for China show that while the growth in floor space sold has slowed to a crawl, price growth and real estate development investment remain in positive territory.

Moreover, the unprecedented scale of this urbanisation requires tremendous investment in infrastructure, road, rail, ports, airports, warehouses, and factories.

Plus it won't be long before many of those apartments fall due to be rebuilt.

Dampier delight

The Pilbara Ports Authority reported its cargo statistics for the month of June 2018, which showed a thumping 47.2Mt of iron ore shipped in a single month - a fresh record high - with 85 per cent of that cargo destined for China and Taiwan.

This was a 10 per cent increase in cargo from a year earlier.

On June 2, the Port of Port Hedland notched a record daily tonnage of 2.4 million tonnes shipped across 12 vessels, the highest ever figure for a 24-hour period. 

Over the full financial year, some 509Mt of iron ore cargo was shipped, a 3 per cent increase year-on-year. 

These may seem to be mere numbers on the page, but if you've ever been up to Port Hedland you may appreciate how truly mind-boggling these statistics are!

The Pilbara Ports Authority reported that its total monthly throughput was 14 per cent higher than a year earlier in June. 

For the financial year total throughput was just shy of 700 million tonnes, a solid 5 per cent increase from a year earlier. 

Annual exports from Australia have now surged to nearly $400 million following the 2016 downturn.

Clearly reports of the China miracle's death have been somewhat exaggerated.

Casuals and sex

Employment growth stalling

Mandatory clickbait blog title, but not quite as exciting as it sounds, apologies - rather a brief sideways glance at the casualisation of the Australian workforce by gender. 

It will be an interesting post, though, I promise.

Roy Morgan Research reported in its employment series for June that the unemployment rate had declined to its lowest level since 2016, another small nugget of positive news. 

On the other hand, the Roy Morgan survey sees employment growth stalling, which may in time imply a further easing in the employment growth rate ahead for the more widely reported ABS numbers. 

Roy Morgan's release also reported part time employment +215,000 higher year-on-year at nearly 4½ million, which is materially higher than the ABS equivalent figure of about 4 million.

Roy Morgan discussed the increasing casualisation of the workforce and the growth of the 'gig economy', although its measures of underemployment have improved gradually through 2018.

Women on top

An interesting theme arising over the past year has been the dominance of female employment trends. 

Female employment growth of 3.2 per cent over the past year has far outpaced that of male employment growth at 1.8 per cent. 

This may in part be because the bulk of employment growth lately has been in traditional 'white collar' sectors, which now employ a greater share of females than in cycles past.

Wave of retirees?

Yet even in the male dominated industries such as construction and manufacturing, the rate of growth in employment has been skewed towards the female side of the workforce.

Justin Smirk of Westpac provided some outstanding colour to these trends in a recent Devils & Details podcast at Business Insider Australia (which, as always, I recommend listening to).

While female participation has lifted significantly over the past decade, the opposite dynamic has played out for males, with some disillusioned men having left the workforce.

It's always important to observe such trends over a period of time rather than reading too much into individual months, but Smirk also highlights how the latest tick down in male participation could indicate a wave of Baby Boomers hitting the retirement age. 

Major banks pass peak fear

Out of commission

A Royal Commission into financial services misconduct always had the potential to represent a tumultuous period for Australia's major banks.

Emerging stories have ranged from the banal to the trivial, to the troubling and the downright nauseating.

But for all that, there's been no 'smoking gun' to cause a collapse in share prices. 

Interim report looms

Commonwealth Bank of Australia (ASX: CBA) has been battered more than most through the hearings, and not without reason, with a range of adverse findings coming to light. 

Since going ex-dividend in the second week of February the CBA share price took quite a tumble, inevitably leading an army of technical analysts to predict a breakout lower.

But instead the opposite happened, with the share price now essentially back to where it was back in September last year before the hearings kicked off (click to enlarge the image).

Some early disclosure here, I bought CBA in the $68-69 range (some of my general market thoughts and trade ideas are discussed on my Twitter feed - I also bought Telstra at $2.87 immediately before of the proposed restructure, but let's not talk about that). 

As the deadline for the interim Royal Commission report looms, the CBA share price has gained more than 12 per cent since mid-June.  

Ruthless efficiency?

It's worth noting that with a PE ratio hovering around 13 and a price-to-book of about 2, the market is not pricing in significant downside for CBA, nor for that matter its industry peers. 

This likely reflects the benign level of mortgage arrears and the improving labour market outlook. 

There may have been a relative shift in sentiment between residential property and equities helping to drive the S&P ASX 200 to a 10½ year high, although what this means for bank valuations may be somewhat reflexive given that the banks have heavy exposure to mortgages.

Markets might also be assigning the Coalition a marginally higher chance of election success on the back of its personal income tax cuts policy, although betting markets aren't much moved. 

The major banks do continue to grapple with a potential loss of market share, as discussed in more detail in our Chemical Change report back in April. 

Of course, markets are not always rational, but they normally are, and they're usually more efficient than many people seem to think.

And the market voting machine is presently judging that the four major banks will emerge from the Royal Commission a little bruised but relatively unscathed, with the hapless AMP bearing the brunt of share price pain. 

Perth has lift-off

Flying high

Well...lookie here.

After years at nothing better than stall speed, Perth domestic airport traffic is suddenly gaining altitude.

Domestic traffic was up only marginally in the early months of the financial year.

But now we are seeing consistent and meaningful growth in traffic for the first time since the peak of the resources boom all the way back in FY2012. 

It's been a long time between overpriced trolley cart drinks, but May 2018 domestic passengers totalled 791,306, which is up, up, and away from 721,318 a year earlier.

And the monthly beats are getting consistently stronger (click to enlarge the image, and follow the link for the time series data back to 2004/5). 

Source: Perth Airport

International passenger traffic was up year-on-year too in May 2018, driven by China and Japan, but far less significantly.

Notably, regional traffic surged 8.5 per cent as resources projects ramp up around Western Australia's major ports.

I flagged this coming trend here where I looked at the marked lift in mineral exploration and metres drilled in the west.

There are more hi-vis vests at Australia's airports bound for regional flights, I've noticed.

Perth is also now promoting direct flights to London, though I haven't done one yet.

Great to see some more upbeat news for WA - let's hope this is clearance, Clarence!

Stalemate

Transactions smoked

Far fewer vendors are listing for auction now in Sydney and Melbourne.

And plenty of those campaigns are being withdrawn.

The sales that did make it under the hammer did so at a higher median price than a year ago, especially for units. 

Source: Domain

But glance if you will at the volume of transactions and the dollar value of real estate sold - obliterated.

Only around 4-5 auctions out of every 10 are now seeing a positive result at hammer time. 

And it's not just auction volumes that are down.

CoreLogic statistics show that new listings in Sydney on a rolling 28-days basis are tracking at the lowest level across their data series, spanning 7 years (and that's even before accounting for substantial population growth). 

Alas, all that stamp duty foregone! 

US recovery thunders on

Jobs galore

US payrolls increased again by a punchy +213,000 in June 2018.

The months of April and May were also revised up by a combined +34,000.

Totting all that up, it puts the 3-month average payrolls gain at +211,000.

This is now by far the lengthiest consecutive run of employment gains on record at 93 months.

The most interesting part of this release was the significant leap of more than 600,000 in the size of the labor force, as workers previously deemed surplus to requirements begin to search for work again. 

The unrounded unemployment rate to three decimal places jumped accordingly from 3.755 per cent to 4.048 per cent in the month of June, but for the 'right' reasons, while there was little change in the 3-month average unemployment rate.

Average earnings growth of +2.74 per cent rounded down (just) to +2.7 per cent, a slight miss on market expectations.

Back to work

Jobs galore, then, and it makes one wonder just how many more people could be working more hours in Australia absent the preoccupation with financial stability.

This dynamic is stimulating quite a bit of debate in the serious financial media at the moment.

The argument - apparently endorsed by the ever-hawkish BIS, though I haven't yet read their latest - seems to be that the US is growing solidly again, so Australia should hike interest rates either (a) to stymie household debt, or (b) to build up a buffer (i.e. tactical, so that rates could be cut again in the future).

Oh, and also cited is (c) the ubiquitous 'risk of an inflation breakout', which always seems to get a mention despite inflation having been benign for a long time now (and indeed, below target). 

The natural counter-argument is that the US is growing solidly because of its commitment to achieving the statutory objective of maximum employment. 

No logical reason why we shouldn't be pursuing the same here.

Changing of the guard

UK housing ticking along

Nationwide reported that the UK housing market is...well, I've screen-grabbed it from my Twitter feed below.

Nationwide is but one data provider, and its index is based on a sample of transactions.

Plus there has evidently been an odd seasonality effect, hence the peculiarly British 3m/YoY basis of reporting. 

But the bigger picture is that with borrowers recognising an end to the trend of ever-cheaper money, nationally prices are now only a couple of per cent higher year-on-year. 

For half a decade ultra-low rates have encouraged household borrowing - which was after all partly the point of easier policy - but the strong uptrend for the housing market seems to have run out of puff for the time being. 

Despite the ongoing uncertainty surrounding Brexit and what that does or doesn't mean, jobs growth has remained strong, the employment rate is at the joint highest rate since 1971, and the unemployment rate is at the equal lowest rate since 1975. 

But mortgage approvals have now softened. 

What happens next will be interesting to watch, with wages growth solid enough, but far from spectacular. 

Construction employment set to slow

Jetting back Down Under now, to round off the week. 

I'm a natural born optimist - especially for the long term - can't help that, sorry.

And it's difficult to be too pessimistic about the Australian economy with the jobs vacancy rate tracking at the highest level we've ever seen. 

If historic trends persist, we should at least in theory now see the unemployment rate fall towards 5 per cent, and quite possibly even lower.

To my mind, there's one significant headwind facing down that equation, however, being the winding down of construction employment.

This is largely just a numbers game.

Construction presently employs a very significant chunk of the workforce - the biggest share in about a century - but that could/should change as housing construction slows.

AIG's Performance of Construction Index (PCI) now shows apartment construction contracting both on a monthly and a 12-month average basis, while the construction index for houses has suddenly dropped from 58.6 to 50.2 (this remains a reading denoting an expansion, if only just). 

Source: AIG

The employment sub-index also declined slightly from May. 

This mirrors what was reported by the ABS on lower house building approvals, and slower new home sales as reported by the Housing Industry Association (HIA).

With investors finding access to credit harder to come by and prices declining in some markets, then dwelling construction seems likely to slow some way from here. 

In short, expect fewer cranes and new apartment blocks on the skyline next year.