Retail numbers limit A fall

Today’s Australian retail sales numbers are a continuation of positive news, which really commenced from the beginning of June this year. A 1% monthly rise in what many consider to still be a timid retail environment should be taken in the context of still very low unemployment, solid GDP growth and inflation at the lower end of the central bank’s target range.

There has been a case that recent retail numbers, as evident anecdotally from Coles and Woolworths reporting last week, were impacted by government stimulus payments and while this is probably true, we don’t think it necessarily detracts from an otherwise strong economy. The jury is still out on the Reserve Bank of Australia’s (RBA) decision to cut rates next week but consensus is still sitting at a hold decision. In the meantime, AUD is riding high finding solid support at 1.0465 against USD despite Fed inaction overnight.

Many economists who forecasted deep rate cuts by the RBA continue to question the numbers and point to excuses but the fact is that the RBA would be proud with what it has managed to achieve. Successive quick cuts to make sure the economy doesn’t fall into a downward spiral while maintaining a vigilant stance on long term inflation pressure. The mining and investment pipeline, while discretionary around timing, won’t escape Australia and so any further cuts will further compound inflationary pressure in the medium term. The RBA will be mindful of this. The reason for cutting aggressively this year was to make sure the demand and consumption side doesn’t fall over, and clearly from recent data, it hasn’t.

China to boost steel production

Separately, City Index’s call in June that the economy was in the early stages of a big turnaround seemed very contrarian at the time. We called a resumption in house price gains and a boost to the steel industry as our key points of reference. On house prices, many of the doomsday scenarios of property prices collapsing haven’t panned out.

On the steel industry, recent news tends to suggest that China is considering a tax rebate to further encourage steel production volumes to rise. China’s Ministry of Industry and Information Technology is considering a plan under which selected steelmakers that sell high-end steel products to exporters would be exempt from the 17-percent value-added tax, according to Shanghai Securities News. This will provide support for iron ore and coal markets over the next few months, insulating the likes of BHP, Rio Tinto and Fortescue Metals from further price falls.