David Jones profit up 10.2%, New data points to strong economic growth: Economy Roundup

Department store giant David Jones has recorded a 10.2% jump in first half profit after tax to $100.5 million, up from $91.2 million, with its gross profit margin hitting an all time high of 40%.

Additionally, the company reaffirmed its profit guidance, with expectations of 5-10% of profit growth for the second half of the year, and for the full financial year, but chief executive Mark McInnes still issued a warning regarding the withdrawal of stimulus.

But while the company offered cautious optimism, it said its effort of reaching a gross profit margin of 40% was the result of cost-cutting and management improvements.

“The margin reflects the work undertaken by management throughout 2007 in renegotiating its 2,700 supplier contracts, the reallocation of space to high-margin categories and the increase in department store exclusive brands, which protects the company’s competitive positioning,” a statement read.

Meanwhile, the annualised growth rate of the Westpac-Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months in the future, was 6.3% in January – above the long-term trend of 2.7%.

Economist Matthew Hassan said in a statement that after rising sharply during the second half of 2009, the index has continued to carry momentum into the New Year.

“Although the annualised growth rate in the Index held steady in January – ending the rapid month-to-month acceleration seen since May last year – it remains well above its long run average, on a par with previous cyclical highs.”

“Moreover there are now clear signs that the pick-up foreshadowed by the Leading Index is showing through in actual activity with the annualised growth rate in the Coincident Index rising back above trend for the first time since September 2007.”

Industrial commodity prices have grown by 2.5 percentage points since August, along with US industrial production up 2.4 points, real corporate profits up 1.4 points, productivity up 1.1 points and domestic labour market conditions up 0.4 points.

Hassan also noted the latest action by the Reserve Bank of Australia to lift rates again, saying “there is still less urgency to the “gradual” tightening moves than there was to the initial moves to unwind “emergency” rate settings late last year”.

“With rates now much closer to neutral (we assess that the Bank now believes rates are only around 50bp’s below neutral), recent wage outcomes suggesting inflation is more likely to remain well contained near term and some residual uncertainty about surprisingly weak housing finance data, we expect the RBA to again opt for a pause in April.”

“However, we continue to expect a resumption in the gradual tightening in May with a further 25bp rate hike and a final hike taking the cash rate to 4.50% in Q3.”

Shares higher after Wall Street rally

The Australian sharemarket has opened higher today following a strong Wall Street lead, after the Federal Reserve reiterated its commitment to keep interest rates low for the time being.

The benchmark S&P/ASX200 index was up 27 points or 0.57% to 4824.8 at 12.00 AEST, while the Australian dollar reached a two-month high of US92c.

ANZ shares rose by 1.1% to $24.41, as Commonwealth Bank shares gained 0.8% to $56.12. Westpac rose 0.9% to $27.14 as NAB lost 0.3% to $26.66.

AWB has downgraded its full-year guidance to between $85-110 million for the year ending September 30 due to underperformance by its grain marketing business.

Additionally, the company said for the half year ending March 31, 2010 the company expects profit before tax and significant items in the $25-35 million range. Managing director Gordon Davis said in a statement that increases in stocks and narrow margins have hurt the company.

“We expect that the domestic grain marketing result will be weighted towards the second half of the financial year but for the full year it is still likely to be significantly lower than the prior comparative period,” he said.

Overseas, Chinese commerce ministry spokesperson Yao Jian has said at a news conference the country wants to keep the system of setting longer-term prices for iron ore. “We advocate protecting a long-term price agreements mechanism for iron ore,” he said.

“We also hope that the ore suppliers, the Chinese steel industry association, as well as the relevant Japanese and South Korean businesses can together protect a long-term price agreements mechanism for iron ore, avoiding big fluctuations in prices.”

In the Middle East, Saudi oil minister Ali al-Naimi has said demand is picking up, which could signal that OPEC does not have to take any action on supply for the remainder of the year. “We have been sailing very well and we will continue to sail very well,” he told reporters today.

Fed pledges low rates, stocks at 17-month high

In the United States, markets have reacted positively to the news the Federal Reserve will continue to keep interest rates near zero for an extended period of time, even though it has signalled upturns in the labour market.

“The (Fed’s policy) committee… continues to anticipate that economic conditions, including low rates of resource utilisation, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” the Fed said in a statement.

Additionally, comments from Treasury Secretary Timothy Geithner have boosted confidence, telling the House of Representatives Appropriations Committee that there is “no way” rating agencies will cut the country’s debt rating.

On Wall Street, stocks rose to a 17-month high due to the good news. The Dow Jones Industrial Average gained 43.83 points or 0.41% to 10,685.98.