US unemployment ticks down

Payrolls: as you were

US payrolls missed expectations in adding +158,000 jobs in July 2018. 

However, this marked a record 94th consecutive monthly again, and in any case there were substantial upwards revisions to the preceding two months totalling +59,000, taking the 3-month average to a very healthy +224,000 for this part of the cycle.  

That was enough to push the unemployment rate down to 3.9 per cent (with the 'U6' measure of unemployment down at the lowest level since 2001).

Earnings were still only moderately higher year-on-year at +2.7 per cent.

 The overall picture is still strong enough, despite the miss on the headline print.

Weekend reads - must see articles of the week

Weekend reads

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Have a great weekend all!

Real retail surges in Q2

Retail beats again

Retail trade beat expectations in rising by as a seasonally adjusted 0.4 per cent to $26.82 billion in June 2018. 

Over the past three months retail turnover has been rising at an annualised pace of 5.4 per cent.

Over the year annual growth lifted from a moribund 2.5 per cent to a somewhat brighter 2.9 per cent. 

A couple of short observations here.

Firstly, allegedly stressed household budgets saw fit to lift to lift real retail sales (turnover in volume terms) by a fairly substantial 1.2 per cent in the June quarter. 

Interestingly volumes were strong over the quarter for department stores, which says something meaningful about the level of price discounting still around. 

With net exports chipping in marginally, it's shaping up to a be another reasonably positive quarter for GDP growth. 

Secondly, retail prices remain very soft.

There's a new GST on low value imports effective from 1 July, so that will support prices to some extent. 

But with Amazon Prime lurking there appears to be very little prospect of inflation getting anywhere near the middle of the target range, this year...next year...the year after that...

Department stores thwacked

Online retail continued to rise inexorably to contribute 5.7 per cent of retail turnover, up from just 4.1 per cent a year earlier. 

That's an alarming rate of increase for the traditional retailers, and department store nominal turnover was thwacked again in June, falling by 1.23 per cent. 

It's rather a case of adapt, evolve, compete or die!

Unsurprisingly, Victoria was by far and away the strongest performing state year-on-year, with Tassie doing OK too. 

The wrap

A third consecutive beat for retail, then, and a timely contribution to GDP growth is to be expected for the final quarter of the financial year to June. 

In other consumption news, new car sales were down by nearly 8 per cent in July, with Holden sales declining to their lowest level in 70 years following on from factory closures (sales of the new imported Commodore are only a third of what they were for the old model a year ago). 

While there's a recognised correlation between housing markets and consumption, some caution is warranted when interpreting these figures. 

The small business instant tax write-off for asset purchases under $20,000 was due to be extended into this financial year, but since legislation wasn't passed before recess this tax benefit remains in limbo until Parliament resumes in 10 days time. 

In other words, some small businesses may have deferred new purchases given that there's no certainty of assets purchased post year-end attracting the instant tax write-off. 

Alternatively, I could be wrong. 

Tell ya two months from now.

Will what got you there get you there?

What got you here won't get you there

It's a catchy phrase, but is it true?

I take a look here.

LNG exports smoke records

Trade bonanza

Aussie exports closed out FY2018 with a blockbuster month, totalling a seasonally adjusted $36.44 billion. 

That's the greatest ever month for Australian exports, taking the annual total blazing past $400 billion for the first time on record, nestling in at a lazy $401.5 billion. 

It was a monster month for coal exports, but the really interesting story is the ongoing LNG ramp up, with all previous monthly and annual records getting well and truly smoked in June. 

Good news for Queensland royalties, but even better for Western Australia which recorded the greatest ever month for merchandise exports for any state at $12.2 billion, eclipsing even those glorious periods where iron ore prices spiked previously. 

The trade services recovery is clawing its way back after a blip last year, largely thanks to booming tourism, although services trade in aggregate continues to run at a moderate deficit. 

Overall, Australia's international trade surplus racked up a massive $1.87 billion in June 2018, with net exports likely to contribute just marginally to GDP growth in the second quarter.

It's been a pretty incredible export boom since 2004 for Australia - The Lucky Country, indeed. 

---

Jostling on rates

ANZ followed Commonwealth Bank in cutting its home loan mortgage rates today.

Variable P&I loans were slashed by 34 basis points to 3.65 per cent.

Fixed rates were also cut for P&I loans to owner-occupiers and investors, by up to 24bs and 13bps respectively.

NAB's best variable home loan rate is already down at 3.69 per cent, so there won't be much movement there.

This latest move by ANZ now leaves Westpac as the outlier with no advertised home loan product priced at under 4 per cent, for the time being at least. 

Shock and ORR!

This time it's (a bit) different

Another day, another housing front page headline, today's special from someone I've literally never heard of being quoted in the media before.

A slightly quieter piece caught my eye in The Australian, quoting BIS Oxford Economics, citing a deficiency in stock in Sydney:

'The difference in Sydney this time is that the downturn comes while there is still a significant deficiency of residential stock. 

That means if the conditions are favourable, the next upswing may come sooner. 

But it still will take its own sweet time.'

Hang on, say what? 

That's right: a stock deficiency! 

Which marks this cycle out as a bit different from those that went before.

End of the boom

BIS noted that Sydney's property booms have tended to end with a period of dwelling price stagnation rather than significant declines, until the market eventually becomes undersupplied again - with site values falling by about half in the intervening period - and this time around will likely be the same, they say.

BIS also pointed out that in this cycle the undersupply will probably come about more quickly as dwelling commencements fall over the next few years, because the Sydney population is growing quicker today than it used to, now at about 100,000 per annum.

There are many ways to measures supply, of course, and I look at them all here each month, so there's no need to re-post all the charts again: rental vacancies, new listings, total properties for sale (stock on market), new land release, and the absolute number of apartments and houses, for example.

With all the cranes on the skyline right now it seems counter-intuitive to even be talking about a stock deficiency or future undersupply, but contrarian calls must always be thus (when I warned on Property Observer in 2013 about potential overbuilding hotspots in Sydney I was met with a similarly muted response, for example). 

The Greater London Authority (GLA) recently ran a report showing how Sydney's population growth rate at 2 per cent has outpaced the rate of increase in the housing stock over the past five years, although there are still many apartment developments to complete.

London has experienced the same dynamic. 

Source: GLA

I have recently heard Brendan Coates of the Grattan Institute making a very similar point.

Don't get me wrong, I can certainly envisage many failed apartment projects and settlement defaults over the next few years, and a surge of apartment completions leading to a temporary spike in rental vacancies - that's generally what happens at the peak of a cycle. 

All of this is also before we consider how some areas have been far more built out than others. 

However, because apartment projects can take years to complete, our eyes can deceive us on the oversupply front.

Say for the sake of argument that the market has built 10,000 apartments 'too many' (however that's measured) in Greater Sydney through this cycle.

The delivery of 10,000 new apartments is noisy, disruptive, and leaves a huge blight on the landscape for a very long period of time. 

At the current rate of population growth that level of supply is being absorbed in about a dozen weeks as new migrants continue to choose Sydney ahead of all other Australian cities. 

COLI exceeds wages growth

Squeezed!

The cost of living increase for employee households picked up to 2.3 per cent at the end of FY2018.

This was slightly ahead of the growth in the wage price index over the year to March (before bonuses at any rate). 

This shortfall will cause a few ripples of excitement! 

Fortunately the main contributors to the change were oil prices (i.e. passed through to auto fuel prices at the bowser) - which have fallen quite sharply since 1 July - and the tobacco excise effective 1 March.

Unfortunately there was also a further increase in healthcare costs, which makes a doubly good argument for not taking up smoking.

On the plus side, good news for cyclists - or at least those that don't get injured. 

The wage price index has also now likely bottomed and will almost certainly improve from here. 

Nevertheless, this was a mildly troubling release that doesn't add much to the case for rate hikes. 

Housing credit exceeds wages growth (as it should)

Demographic waves

APRA's latest ADI figures showed a solid year-on-year increase in total housing credit to $1.64 trillion in June.

Each month there's tedious analysis in some quarters comparing the growth in total housing credit to the wage price index (or the rate of consumer price inflation), although there's no logical reason why these measures would be directly linked. 

As the 2016 Census showed there's a huge new wave of 25 to 34 year olds in Australia, driven by immigration, especially in Sydney and Melbourne. 

And with a housing market valued at about $7 trillion, some Baby Boomers are choosing to carry some mortgage debt into retirement, and why not? 

Good for them, frankly.

Naturally the same commentators calling for less mortgage lending want there to be more first homebuyers, which is a twisted logic. 

From a financial stability perspective debt serviceability is ultimately what matters.

And as Genworth's 1H18 release showed today only Western Australia has seen an meaningful year-on-year change in delinquency rates, albeit a 13bps increase to less than 1 per cent.

This reflects the preceding downturn in the local economy and housing market, not the inevitable improvement that lies ahead.

Source: (ASX: GMA)

What Australia's economy and businesses need right now is more dynamism and less whining.

More likely, though, the beatings will continue until morale improves!