Important

In last week’s Budget Scott Morrison (Federal Treasurer) unveiled some of the most significant changes to superannuation in 20 years.

The changes will impact both pre and post retirees and while none of this is legislated (and if recent history is any guide, it may not) we are already discussing any potential implications at our review meetings.

To understand how this may impact you please attend our upcoming seminar where Matt and Stephen will review the Budget, the economic outcomes, and the political hot topics.

REMINDER to RSVP for DMA Financial Strategists Investment Outlook & 2016 Budget Review briefing

Date: Wednesday 25th May 6.15pm – 8.00pm followed by drinks & canapes

Venue: Adelaide Pavilion, Veale Gardens, Cnr South Tce & Peacock Rd (parking on site)

RSVP reply email or phone 8363 3366

David

UBS jobs report

The American employment numbers for April came out this morning and although the reaction from economists was pretty downbeat, with a lot of them cutting their interest rate calls from two cuts this year to one, the market seemed to think it was OK.

Here’s how the US dollar index traded before and after the release:

The Australian dollar did the reverse – up at first then down again. It’s trading at US73.67c this morning, which is down a bit from when I did the ABC News report last night, so the net impact of the US jobs report is a slight negative on the Aussie.

The US economy added a seasonally adjusted 160,000 new jobs, which was less than consensus forecast, and the unemployment rate held steady at five per cent.

I think the main reason the market liked it was that wages rose 2.5 per cent, so that wage growth is showing, if unspectacular improvement.

There was also a nice chart on Business Insider of the percentage of people quitting their jobs, which hit a cycle high of 10.8 per cent:

As one analyst put it: “People are telling employers to put up or shut up. Job switching equals wage growth.”

But I tell you what – world’s gone a bit upside down when Wall Street analysts are applauding higher wage growth, but that’s the world we are in now. Everyone understands that it isn’t good for anyone if wages don’t increase – companies have had too good for too long.

One more chart from this morning’s data that is relevant one of my themes this week: the number of working age people who are either in the labour force or in a job.

Both of these things have been improving lately (although the number in the workforce has only just ticked up recently), but neither is back to pre-recession levels.

The Budget

The big surprise in the Budget on super was the lifetime non-concessional cap of $500,000, counting anything put in after July 1, 2007.

The new limit of $1.6 million on the amount that can be transferred into a tax-free retirement phase account was not all that surprising, but the new lifetime cap is a shocker.

Up to 7:30pm on Tuesday, people under the age of 65 could make post-tax super contributions of up to $540,000 every three years, or $180,000 per year. On top of that, the limit on pre-tax contributions has been lowered to $25,000 – from $30,000 for those under 50 and $35,000 for over-50s.

This is a huge victory for Treasury, which has always hated superannuation and has been nagging successive governments to wind it back. For example, I was chatting to a couple of very senior Treasury officials in the lockup, and they offered the view that Peter Costello should never have made post-60 withdrawals tax-free. It was, they muttered, a disaster.

That may be true (I think it probably is – it was never really affordable in the long term, and just got everyone’s hopes up) but the Turnbull Government has indulged in a kind of panicked overkill.

It seems to me the solution to the presumed abuse of the superannuation tax concessions would be either to limit how much can be put in, or how much can be taken out – one or the other.

This Government has done both, which is why it’s such a victory for Treasury. It wasn’t enough to get rid of Costello’s legacy of tax-free withdrawals over 60, they had to crunch contributions as well.

It’s a double attack on private saving and quite amazing in its ferocity, as well as self-defeating. The money is being used to cut company tax (over the forward estimates the cost of the small business tax concessions is the same as the money raised by the attack on super), but small business owners are being told not to save it. They should spend and go on the pension.

Other budget measures pale by comparison with the new lifetime non-concessional cap and the $1.6 million limit on transfers to retirement phase accounts, but there are a few worth mentioning:

1. Individuals aged 65 to 74 will no longer need to be working in order to be able to make superannuation contributions.
2. All individuals under 75 will be able to claim an income tax deduction for any personal superannuation contributions they make. At the moment, only individuals who earn at least 10 per cent of their income from salary and wages can claim a tax deduction.
3. The point at which high-income earners will pay additional contributions tax will be lowered from its current $300,000 to $250,000.
4. The budget announced the end of the exemption for superannuation funds earning income-supporting transition to retirement pensions (i.e. pensions paid to individuals over preservation age, but not retired).
5. They’ve ended the availability of a tax deduction for antidetriment payments for death benefits. However, lump sum death benefits to dependants will remain tax-free.

One other thing: apart from the new lifetime cap, which started at 7:30pm on Tuesday, all the other superannuation measures in the budget will start July 2017, presumably to give people time to adjust.

But don’t forget there’ll be another budget between now and then. It will probably be brought down by the same Treasurer, but it might be Chris Bowen’s first budget, you never know. And in any case, even if it’s the same bloke doing it, anything’s possible as we learnt this week.

The rate cut

This was the second bad thing that happened on Tuesday (the budget was the third – the first was ANZ’s half yearly result, on which more later).

The question is: what the hell is the Reserve Bank doing? Was Glenn Stevens under pressure from his central banker mates around the world to stop making them all look ridiculous with his cash rate of two per cent when they’re at zero – or less?

Last year I did a series of two essays in this weekly review headed: “Central banks are destroying the world” (to read, click here), and nothing has happened since to change my mind. If anything, it’s worse, since the ECB cut to -0.3 per cent in December and then again to -0.4 per cent in March.

The Fed hiked in December but the Bank of Japan went negative for the first time. It looked like the RBA was standing firm against this madness, but Tuesday’s cut changed that.

It’s true growth is below trend and inflation went negative in the March quarter, reducing the annual core rate to 1.5 per cent. But these facts have little or nothing to do with interest rates, and the outgoing Glenn Stevens himself has been saying it won’t be fixed by monetary policy, and there are good reasons for that.

Low interest rates merely squeeze the life out of savers, especially retirees, and force them to both spend less and take more and more risk.

They don’t, and won’t, encourage more borrowing because first, households have already got too much debt, second, because the banks are not lending against anything other than real estate, which means businesses can’t borrow, and third, because APRA has clamped down on investment lending.

To the extent that monetary policy achieves anything at all these days, in my view it merely offsets the effect of reduced bank lending and fiscal consolidation by the government, trying to get the deficit down from the $39.9 billion estimated for the current financial year (which, by the way, is $2 billion more than last year’s actual deficit).

Why is inflation so low? Because commodity prices, principally oil, have been falling and because wages growth is weak as a result of technology. I don’t think that’s particular mysterious, but none of it can be fixed by cutting interest rates: falling commodity prices are a global phenomenon caused by oversupply, not “under-demand”, and technology is not only unstoppable, it has a very long way to run.

Why is economic growth below trend? That’s all it is, by the way – a bit weak, a bit below trend. There is no recession.

The main reason, as I pointed out here a few weeks ago, is the global decline in working the age population, including in Australia.

To recap briefly: since 1960 the average number of births per woman has fallen from 4.9 to 2.5. Nearly half of the world’s population now live in a country where the fertility rate is below the replacement level of 2.1 per cent.

As a result of that plus the retirement of the baby boomers, the growth in the global labour force has halved from almost two per cent a year between 1960 and 2005, to one per cent after 2005.

Economic growth is the simple addition of population growth plus productivity – obviously what a nation produces is a function of how many working people there are and how much each of them produces.

Not only is the working age population declining everywhere, but productivity growth is weak as well. That results in a decline in “potential GDP growth” – that is, the best that can be achieved sustainably.

On the morning after the budget, I bumped into Saul Eslake in the breakfast room of our rather modest Canberra hotel. You’ll remember he’s the former chief economist of ANZ Bank and more recently Merrill Lynch. He’s now consulting and giving speeches and over a coffee we talked about the dramatic impact on economic growth of falling working age populations. To illustrate, Saul shared with me his standard Powerpoint presentation, which contains these stunning charts:

So GDP growth in Australia is roughly at its maximum potential level, given population growth and productivity, yet the Reserve Bank has cut interest rates to recession levels to try to get it up – almost certainly in vain.

Much the same goes for the rest of the world, except growth is a little above potential, because population growth has fallen more than here.

There are two implications of this: first that the crushing of savers and retirees by the world’s central banks is pointless and second that growth will be low for a long time, which means the normal returns available from growth investing will also be low.

The capital growth of the Australian share market over the past 50 years has been 6.5 per cent a year. Dividends add about four per cent per annum to that.

For the past 50 years, the average GDP growth rate has been 3.5 per cent. It’s now stuck at 2.5 per cent and that will reduce the potential growth in share values by at least that much, probably more if global growth is even less, since about 40 per cent of the market consists of globally exposed firms.

I suspect we will need to get used to five per cent average capital growth from the share market, not 6.5 per cent.

In addition, it’s hard to imagine that average dividend payout ratios can stay where they are – that is, at about 75 per cent. Companies will need to start reinvesting in their businesses soon.

So total returns are likely to be two to three per cent lower than they have been. And as we know interest rates are also at historic lows, so investment incomes are down as well.

RBA statement

In fact yesterday’s Reserve Bank Statement on Monetary Policy slashed the inflation forecast for December 2016 from 2-3 per cent to 1-2 per cent, so it gets worse for retirees.

The market promptly priced in one more rate cut, and is half pricing in two more cuts – to 1.25 per cent. The dollar dropped to below US74c.

The RBA has now fully joined the global central bank fight against low inflation. Rates aren’t being cut because of the threat of recession, or because employment is weak (it’s not) but because prices aren’t rising fast enough.

A cash rate of 1.5 per cent is now fully priced in by the interest rate futures market. That implies an exchange rate of around US69c, as shown by this chart:

Whether it gets to that will depend on the US dollar, and therefore the trend of US rates, and commodity prices.

This is positive for resources stocks and other exporters, and the whole situation is OK for domestically focused companies, especially those that aren’t focused on price increases.

What does all this mean?

The main thing it means for investors, I think, is that we have to think carefully about what we’re doing and not just invest blindly in the share market – or property for that matter.

We have to look for value and identify trends, not simply invest in exchange traded funds – unless they are sector specific.

For example Stan Druckenmiller of Duquesne Capital Management, an investment manager with one of the best records in history (30 per cent average annual return from 1986 to 2010), said this week that the stock market is “exhausted” and that his biggest allocation now is gold – because of “the absurd notion of negative interest rates”.

Another example: I was at a dinner on Thursday night and sat next to Jim Varghese, who is executive director of the Australia India Business Council.

He brought me up to date with what’s happening in India, which is that Prime Minister Modi looks like getting his GST through the Indian upper house and into law. My dinner companion says this will transform India’s GDP growth.

That’s because the current official growth rate of five per cent probably understates reality by as much as half because of India’s colossal black economy. Jim Varghese says that, as with Australia’s GST, India’s will do a lot to clean up the black economy and GDP growth is likely to zoom to 10 per cent once it happens.

I don’t know anything about this, and I pass it on for what it’s worth. But it potentially means that India takes over from China as Australia’s most important market for a wide variety of products, and that companies that are in early will be big winners.

The other important thing going is the huge shifts in wealth caused by digital disruption. Already vast wealth has been captured by Google and Facebook at the expense of old media; Amazon had added about $US250 billion in market value in five years from online retailing and its cloud services business.

I was chatting this week to Ruslan Kogan who has created an (unlisted) smaller Australian version of Amazon, minus cloud services, and Justin Williams, who has a start up called MeeMeep, which is a sort of Uber of couriers, and James Wakefield who has been running a business called InStitchu for a few years, which does online suit tailoring, sending the measurements to China for the suits to be made.

There are plenty of other examples of course, especially in United States, of unlisted so-called “unicorns” capturing a billion here and a billion there.

Finding disruptors that will make it through what my friend John Wylie calls the “valley of death” (the point when cash flow is insufficient to fund the growth and the business runs out of money) is a different matter entirely of course – like finding a needle in a haystack.

That’s why it’s probably better to identify good fund managers who can do the work for you, like former Fairfax chief executive, David Kirk, who runs Baillador Technology Investments, which Mitch Sneddon reviewed favourably in Eureka last month: click here to read more: Bailador Technology.

Other good stock pickers I know include Steve Johnson of Forager Funds and Matthew Kidman of Centennial Funds Management, but there are plenty more. The trick is to find them and hope they don’t rip you off with horrendous fees.

The other trick, of course is to avoid disruptees, like Fairfax Media has been in the past, and maybe those who disrupted it – REA, Seek and Carsales – will be in the future. Those companies are desperately trying to escape disruption by expanding offshore, which might work for a while.

Bank results

ANZ seems to the market favourite among the banks at the moment, so when it announced a cash profit decline of 24 per cent and cut the dividend, the share price went up.

The response of Goldman Sachs banking analyst Andrew Lyons was typical:

“ANZ remains our top pick of the banks given: (1) improving returns in Asia; (2) strong momentum in its domestic franchise; and (3) attractive valuation. On the final point, while ANZ has begun to close what was record valuation dispersion versus the sector, even on its reset DPS, its yield premium to peers remains at 0.7 per cent, which is more than one standard deviation cheap versus peers (Exhibit 1). This is despite ANZ’s adjusted 1H16 payout ratio being 67 per cent versus CBA at 71 per cent, WBC at 80 per cent and NAB at 80 per cent.

Here’s exhibit 1:

And here’s exhibit 2:

Mind you, this is for people who have to invest in banks to maintain their index weighting, which doesn’t necessarily include you. You can decide whether or not to invest in banks, and I’m not sure you should (although I have a dreadful record on the buggers, so you might want to take my opinion with a grain of the proverbial salt).

As for NAB, well it also went up on Thursday after announcing a shocker of a result – a $1.7 billion loss, in fact, the second largest in history, bigger than Westpac’s $1.6 billion in 1991 and exceeded only by the State Bank of South Australia’s $3 billion in the same year.

And as my friend and banking journo, Ian Rogers, wrote: “A loss is a loss (is a loss),” even if it is due to a capital write down on the Clydesdale bank demerger.

NAB’s total loss on its UK adventures, according to these results, is $5.1 billion. That is real money, and no amount of trying to gloss over it and saying it’s a one-off can disguise the disaster.

But share markets look forward, not back, and the market consensus is definitely in line with Steve Bartholomeusz’ comment in The Australian this week: “Stripped of the disfiguring impacts of the distancing of NAB from its 30-year engagement in UK banking earlier this year, NAB’s cash earnings of $3.31 billion in the March half, a 6.5 per cent increase on the same half last year, represent a very strong performance given the subdued context in which the now Australasia-centric group operates.”

Amen, just don’t mention the war.

Last week: By Shane Oliver, AMP

Investment markets and key developments over the past week

Share markets had a messy week as the return of growth worries weighed on European, Japanese and US shares. Despite falls in commodity prices and some downgrades from the banks including one cutting its dividend, Australian shares were around flat helped by the RBA’s rate cut and an implicit easing bias in its Statement on Monetary Policy (SOMP). Global growth concerns also pushed bond yields down, weighed on commodity prices and helped along with the RBA’s rate cut push the $A down. While the $US rebounded its rise just looks like normal volatility in a downtrend.  

Donald Trump wins the Republican primaries. So much for my view that Donald Trump won’t get a majority of delegates leading to a contested GOP convention. Cruz and Kasich have now dropped out. So it seems hurling around divisive abuse and advancing play school solutions to complex to problems is the way to secure the Republican nomination (Mexicans and Chinese are rapists, implicating Cruz’s father in the assassination of JFK, etc). This must be hard for decent Republicans. Fortunately polls – particularly of independents who will decide the outcome at the presidential election – show Hilary Clinton (who only needs 15 per cent of remaining delegates from Democrat primaries to secure a majority) well ahead of Trump. Trouble is that Trump will now swing back to the centre (ie tone down his rhetoric – if that is possible!) and an upset (eg terrorist attack on US soil leading to support for a “strong man”, a US recession or criminal charges against Hillary Clinton in relation to her use of emails as Secretary of State) means that a common sense victory in the US presidential election six months away is not assured.

Apart from big changes to superannuation, the Australian 2016-17 Federal Budget was rather uninspiring, with trivial income tax cuts and nothing really new in terms of contributions to long term economic growth. Sure there’s $50bn in infrastructure spend over six years but only just over $1bn of that is new.  The plan to reduce corporate tax rates for small business is welcome but for large business it will be a long time coming. The real focus of the Budget seemed to be on presenting the Government as “fair” (hence the super hit to higher income earners) ahead of the July 2 election.

The changes to superannuation are consistent with the move to set its objective as providing income in retirement and they still leave superannuation as highly tax preferred compared to alternatives. The concern though is that yet another big change to super and the retrospective nature of some of those changes will further affect confidence in it – likely pushing the perception of super as the “wisest place for saving” in the Westpac/MI consumer survey to another new low, that it will adversely affect the supply of patient long term saving available to help grow the Australian economy and that it will further dampen incentive in the economy because it’s a de facto tax hike for high income earners at a time when the Australian tax system is already highly progressive (the top 5 per cent already contribute 33 per cent of tax revenue). The moves may also push funds into other strategies such as negative gearing.

RBA cuts the cash rate to a record low of 1.75 per cent, more to come. In cutting for the twelve time in this rate cutting cycle which started in November 2011 the RBA cited a lower outlook for inflation after the much lower than expected March quarter inflation outcome and backed this up in its quarterly Statement on Monetary Policy (SOMP) by lowering its inflation forecasts for this year to just 1 to 2 per cent, and to 1.5-2.5 per cent for 2017 and into 2018. A desire to see a lower Australian dollar was arguably another consideration. While the RBA’s SOMP made no substantive changes to its growth forecasts which see growth running around 3 per cent, it is rightly concerned about preventing sub-target inflation from becoming entrenched in expectations and the associated risk that this could drift into sustained deflation, a la Japan. And it would prefer to manage any risk of reinvigorating home price strength in Sydney and Melbourne via macro prudential regulation rather than run the risk of leaving interest rates too high. With the RBA’s ultra-low inflation forecasts being based on market expectations for one more rate cut at the time the SOMP was prepared the implication is that the cash rate may have to fall even further (to maybe one per cent) to be confident that inflation will return to within the target range. So by implication the RBA has signalled a strong easing bias. Given the downside risks around inflation, the upside risks for the $A if the Fed continues to delay and continued weak demand growth we see another rate cut around August, with the high risk of another move in November.

The announcement that RBA Deputy Governor Philip Lowe will replace Glenn Stevens as Governor in September is no surprise and welcome. Dr Lowe’s expertise and experience at the RBA leaves him well placed for the role. He has a similar approach to Glenn Steven’s so it’s hard to see significant changes to the operation of monetary policy. Meanwhile, Glenn Steven’s huge contribution to macro-economic stability in Australia should be acknowledged. While the RBA has made some mistakes on rates these are minor and it has quickly changed tack once it has worked out its mistake – eg, through the GFC and the recent easing cycle. More broadly Glenn Stevens’ quick rate cuts in 2008-09 played a huge role in Australia avoiding the recession that hit all other OECD countries. At the same time RBA monetary policy has helped anchor inflation around the target zone of 2-3 per cent. While some may criticise Governor Stevens for overseeing housing bubbles and poor affordability, these problems owe to the poor housing supply response rather than monetary policy settings.

Major global economic events and implications

US data was mixed with weaker manufacturing conditions in April, mixed jobs data and stronger services sector conditions, stronger construction activity and a smaller trade deficit. Meanwhile, the Fed’s quarterly bank survey reported stronger lending standards and reduced demand for business loans but easier lending standards and higher demand for household loans. Meanwhile, the US March quarter profit reporting season is now 86% done. Results generally have been better than expected – with 75 per cent beating on earnings and 55% beating on revenue – but not by much as earnings growth for the quarter has only improved to -8.2 per cent year on year from around -9.5 per cent.

Chinese business conditions PMIs fell back slightly in April. Fortunately, they remain above recent lows and the moves were too minor to read much into. The overall impression remains that China is not going to have a bust but it won’t be rebounding either. Meanwhile home prices rose again in April as inventory levels continue to fall. Quite clearly the “ghost city” bust of a few years ago came to nothing and the property market is getting hot again.

Australian economic events and implications

Australia saw mainly solid data over the last week with another bounce in building approvals (albeit the trend remains down), solid home price gains in April, a rebound in new home sales, modest growth in retail sales and a sharp improvement in the trade deficit for March. In fact, net exports look like contributing around 0.75% or so to March quarter GDP growth as resource export volumes along with services exports surge. So the recession some still look for is likely to remain elusive. But there was a slight slippage in business conditions in April. 

Outlook for markets

Expect short term share market volatility to remain high. May always seems to be a nervous time as now everyone knows about “sell in May and go away, come back on St Leger’s Day”, global growth remains fragile and uncertainty lingers around the Fed. However, beyond near term volatility, we still see shares trending higher this year helped by a combination of relatively attractive valuations, further global monetary easing and continuing moderate global economic growth.

Very low bond yields point to a soft medium term return potential from them, but it’s hard to get bearish in a world of fragile growth, spare capacity and low inflation.

Commercial property and infrastructure are likely to continue benefitting from the ongoing search for yield by investors.

Capital city residential property price gains are expected to slow to around 3% this year, as the heat comes out of Sydney and Melbourne. Prices are likely to continue to fall in Perth and Darwin, but price growth is likely to pick up in Brisbane.  Cash and bank deposits are likely to provide poor returns – getting even poorer!

The ongoing delay in Fed tightening poses further short term upside risks for the $A. However, any short term rebound is likely to be limited and the longer term downtrend resume as the interest rate differential in favour of Australia narrows as the RBA resumes cutting the cash rate and the Fed eventually resumes hiking, commodity prices remain in a secular downswing and the $A undertakes its usual undershoot of fair value.

 

Next week: By Craig James, Commsec

Consumer confidence and housing data in focus

After the data deluge over the past week including a Reserve Bank Board meeting and Federal Budget, the coming week is somewhat more sedate in terms of economic data releases in Australia. Across the globe investors will focus on the Chinese economic data released over the week. While in the US, retail sales data will garner interest in the latter part of the week. Also a Bank of England interest rate decision and Eurozone economic growth will dominate discussion on Thursday and Friday.

In Australia the week kicks off on Monday with ANZ jobs ads. In the past, budding employers would advertise positions in newspapers or on job websites. Now positions are more likely to be found on individual company websites or through social media. So while the data on job ads is less instructive, figures show that they are still up a sizeable 10.7 per cent on a year ago.

On Tuesday, the weekly consumer sentiment reading is released. It will be first opportunity to gauge consumer reactions to not only the Reserve Bank interest rate cut but also the Federal Budget. It is likely that confidence levels lifted, given the rate cut was passed on in full by most banks. In addition the tax cuts for middle income earners discussed in the budget would be mildly stimulatory.

On Wednesday, the Westpac/Melbourne Institute monthly measure of consumer sentiment is released – a survey that provides a useful check on the similar and timelier Roy Morgan weekly survey.

Also on Wednesday, data on housing finance is issued. The data is somewhat old news given that it precedes the latest interest rate cut. No doubt housing activity will receive a further boost in coming months. For the record, based on data from the Bankers Association, we expect that loans for owner occupation (loans for people wanting to live in homes) fell by 2.2 per cent in March. And the total value of loans (owner-occupier and investment) probably fell by 1.5 per cent.

On Thursday, the Reserve Bank will release figures on credit and debit card lending. Also the Reserve Bank Assistant Governor Malcolm Edey delivers a speech at the Cards & Payments Australia conference, in Melbourne. No title for the speech has been released as of yet, however the subsequent Q&A session is open to the media and may generate some discussion on the Reserve Bank’s updated inflation and growth forecasts.

Also on Thursday the Western Australian State Budget for 2016-17 is released.

And on Friday, the lending finance data for March is released by the ABS – the broadest measure of new loans being taken up by consumers and businesses. The latest data shows lending commitments are just shy of the 7½ year highs record in September 2015, primarily underpinned by business and housing loans.

Spotlight on US and Chinese data

So-called ‘top shelf’ economic indicators are released in China in the coming week. And in the US the focus will be on the retail sales data released on Friday. Also over the week a number of Federal Reserve speakers are scheduled, including Evans, Kashkari and Williams.

China will actually kick off proceedings over the week – with the release of trade data on Sunday. A trade surplus of around $40 billion is expected for April, with a modest lift in exports offsetting an anticipated slide in imports.

In the US the National Federation of Independent Business releases its Business Optimism index alongside the JOLTS survey of job openings. Data on wholesale inventories and sales are also slated for release on Tuesday.

In China inflation data is released on Tuesday. Similar to Australia and most parts of the globe, inflation remains well contained. The headline consumer price index is running at around a 2.3 per cent annual rate, (boosted by food prices) while producer prices continue to suggest a modest deflationary environment.

On Wednesday the usual weekly data on home purchase and refinancing is issued alongside the monthly budget data.

On Thursday, the weekly figures on claims for unemployment insurance are released together with the import price index.

And we have to wait till Friday for the ‘top shelf’ indicators – namely retail sales and producer prices. Economists tip a solid 0.7 per cent increase in April retail sales after the 0.3 per cent slide in March. No doubt fluctuating petrol prices are having a significant influence on the results. Encouragingly core sales (sales less autos and gasoline) are expected to have lifted by 0.4 per cent in April.

In terms of the producer price index (business inflation), there are no signs of inflationary pressure and thus no rush to lift rates. A 0.1 per cent rise in the “core” rate (excludes food and energy) is expected. Data on business inventories is also issued with the University of Michigan confidence reading.

In China on Saturday, key ‘top shelf’ indicators are also issued, namely retail sales, production and investment. Annual growth rates are slowing, but that is ‘normal’ for a maturing economy. Also lending and money supply data is between Tuesday and Sunday.

Sharemarket, interest rates, currencies & commodities

The Reserve Bank cut the cash rate to a historic low of 1.75 per cent on Tuesday. Essentially the low inflation result provided policymakers with an opportunity to provide an additional degree of stimulus without having to worry about inflation. The statement following the decision suggested a more cautious tone when it came to economic activity in the early part of 2016.

The next trigger point for monetary policy will be the inflation data released on 27 July. According to current pricing in financial markets, there is now a 52 per cent chance of a rate cut in August. Looking further out, another rate cut is fully factored by December.