Aussie Car Sales Up – Wages Not So Up

Australians could be forgiven if they missed a new record in their economy this week.

Motor vehicle sales, one of the nation’s least-watched economic data, reached an all-time monthly high in May as buyers splashed out on more than 100,000 new vehicles. The buoyant trend appears to defy central bank and economists’ warnings about weak consumer spending amid record-low wage growth and record-high household debt.

Or perhaps things aren’t so bad and Aussies are getting used to tight-fisted employers. While household consumption rose only 0.5 percent in the first quarter, the measure is still just under its 10-year average. At the same time, some things are getting cheaper: car prices have been flat or falling in recent years, and rising slower than workers’ wages, according to Craig James, an economist at Commonwealth Bank of Australia’s securities unit.

“While consumers at the moment aren’t overly chipper about life I think they’ll get used to the fact that wages are growing at a much slower pace than what they’ve done in the past,” said James. “Things have been getting more affordable and that just reflects the fact that our standard of living has been continuing to increase.”

Sales of new motor vehicles rose for the third straight month in May, with annual purchases of sports utility vehicles and other more commercial-type vehicles near record highs. Buyers still aren’t feeling too well-heeled though, with annual growth of luxury cars at five-year lows, according to the Commonwealth Bank.

The Reserve Bank of Australia is hoping Aussies don’t get too complacent about their miserly pay gains. Governor Philip Lowe said as much on Monday, when he encouraged workers to ask for larger wage rises. Company profits are soaring and fatter pay packets would of course help core inflation return to the bank’s 2 to 3 percent target.

But workers’ fears about job security are a big factor holding them back from making demands. And while cars may be an affordable luxury, houses aren’t.

One of the RBA’s biggest concerns is that a mortgage mountain that’s driven household debt to 189 percent of income becomes a long-term strain on spending. While consumption is yet to fall off a cliff, the savings rate dropped to the lowest in almost nine years in the first quarter.

“People are still spending,” said James.  “They’re just spending in different ways.”

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

Aussie Dollar Update

Reserve Bank of Australia (RBA)

Still no policy changes!
For a sixth month in a row since cutting it in August, the RBA’s interest rates remains at 1.50%.

Apparently, Philip Lowe and his gang believe that “holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.” Not really surprising after Lowe has all but said that they’re done cutting rates for now!

The global economy is fine
The RBA barely made any changes from its outlook last month. It still believes that improvements in the global economy have boosted commodity prices, which have provided “significant” boosts to Australia’s income. It’s also still iffy about China’s recovery, saying that the composition of growth and the pace of borrowing still pose risks. Lastly, it recognized that higher inflation rates are partly due to higher commodity prices.

Ditto for the domestic economy
The central bank noted that the economy is “continuing its transition” from the mining boom by growing by 2.50% in 2016. It nodded to exports that have “risen strongly”as well as “non-mining business investment that has risen over the past year.”

The RBA also emphasized that its optimistic outlook is supported by low interest rates and exchange rates. It repeated that the Aussie’s depreciation since 2013 has “assisted the economy” from the mining boom, and that a stronger Aussie would “complicate” the adjustment.”

As for the labor market, the RBA still thinks indicators are mixed, but this time it conceded that employment growth is concentrated in part-time jobs. This, as well as the subdued labor cost growth, is why the central bank expects underlying inflation “to stay low for some time” even as headline inflation is expected to hit above 2.0% in 2017.

AUD bulls saw red
Remember market players were mostly expecting the RBA to strike against the Aussie’s recent gains by jawboning a bit.

But with Lowe and his team mostly maintaining their stance last month, traders have moved on to expect rate hikes from the central bank this year. After the release, futures pricing showed a 33.3% (up from 29.9%) possibility of a rate hike before 2017 while rate cut speculations slipped from 3.4% to 3.3%. Not surprisingly, the Aussie ended the day higher against its counterparts.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.