THE WEEK AHEAD: Mixed signals on the recovery

One development that may have missed your attention over the Christmas/New Year period was a new trade agreement involving Australia. But this isn’t your ordinary garden-variety bilateral free trade agreement, but rather Australia’s largest free trade agreement involving six nations of the Association of Southeast Asian Nations (ASEAN) and New Zealand.

At this stage the agreement covers Australia, New Zealand, Brunei, Burma, Malaysia, the Philippines, Singapore and Vietnam. But the Australian Government expects four other countries – Indonesia, Cambodia, Laos and Thailand – to ratify the agreement “in the early part of the year”.

Total two-way trade with ASEAN in 2008/09 was $83 billion or around 15% of total trade – broadly on par with Australia’s two-way trade with China. The Government also notes that 42% of Australian exporters trade with ASEAN, amounting to around 18,500 businesses. So the new free trade agreement will have a broad impact.

As always with new trade agreements, the full benefits will only be realised over time – that is, over the next 10 years. But initially agricultural exporters will get most benefit with Asian nations immediately eliminating tariffs on around $42 million of produce.

For some businesses the announcement of a free trade agreement will be greeted positively – with those firms seeking to expand their presence in Asian markets. For consumers, the news is positive, with the prospect of cheaper goods, especially clothing, shoes, fabrics and some electrical goods. But for other Australian companies, the establishment of a free trade group may pose a risk to their competitive position. Overall, however, a further freeing up of trade flows must be seen positively for the broader economy.

Interestingly, at the same time that a new free trade agreement came into force with Australia and New Zealand, ASEAN implemented an even larger trade agreement with China. When fully implemented, the ASEAN-China free trade zone will be world’s third largest, behind the European Economic Area and the North American Free Trade zone. The ASEAN-China trade zone covers a massive 1.9 billion people with two-way trade estimated at US$200 billion.

The bottom line is that trade barriers continue to be brought down across the globe, pointing the way to more efficient economies, more open trade and to potentially lower prices for consumers.

The week ahead

So far in 2010 there have been decidedly mixed readings on the economy. In both the manufacturing and services sectors activity eased in the latest month but there were solid gains in dwelling approvals and car sales. In the coming week there are no fewer than half a dozen economic indicators to be released and it’s entirely possible that another batch of mixed signals will be in the offing.

On Monday, figures on job advertisements are released together with the monthly inflation gauge. On Tuesday, data on tourist arrivals and departures are released together with housing finance figures. And on Wednesday lending finance data is issued with the December job report out on Thursday.

The job market indicators should prove encouraging. The Oliver recruitment group has already signalled that internet job ads rose by 0.5% in December. Clearly businesses are keen to attract more staff ahead of a more buoyant 2010. And we expect Thursday’s job figures to show employment increasing by around 25,000 people. While the unemployment rate could tick higher from 5.7% to 5.9%, it does appear that the jobless rate has peaked near 6%.

The lending figures may prove less illuminating. New home loans probably fell 6% in November with first home buyer activity waning ahead of the ending of the Government’s special grant. But personal lending may have lifted in the latest month as consumers grow more confident about the future. The $64 question is whether business lending also starts to lift after a year of effectively trending sideways.

The monthly inflation gauge is also worth keeping an eye on. Inflation has effectively gone nowhere over the past four months, and if the trend continues into December then the Reserve Bank may be happy to leave rate settings alone next month.

In the US the indicators of most interest are concentrated at the tail end of the coming week. In particular retail sales figures are issued on Thursday with consumer prices and industrial production on Friday.

Economists tip a 0.2% lift in retail sales after a solid rise in November. And production is tipped to have lifted 0.4%, again after a solid November result. If the readings surprise on the high side, both the sharemarket and US dollar can be expected to benefit.

Also on the schedule in the coming week is international trade (Tuesday), the Beige Book report on economic conditions (Wednesday), with consumer prices, consumer sentiment and the Empire State survey all slated for Friday. No fewer than five of the regional Federal Reserve presidents are also due to deliver speeches over the week.

Apart from the US data, over the week China is expected to issue a number of its key economic indicators including trade figures, money supply and lending. China is expanding solidly at present and further signs of robust growth would provide a fillip to Australia’s resources sector.

Sharemarket

The US profit-reporting season commences in the coming week. Alcoa traditionally kicks off proceedings and that will again prove to be the case with the mining giant reporting after the bell on Monday. Analysts are looking for a solid start to the earnings season with Alcoa benefitting from high aluminium prices in the quarter and earlier cost cutting. While 22 companies have earnings results over the week, the only major companies on the radar screen over the week are Intel (Thursday) and JP Morgan Chase (Friday).

While the focus tends to be on the US earnings season, it’s important to note that profit results will be starting to filter out right across the globe (except Australia) over the coming week, driving sharemarket activity. Investors will be looking for earnings validation from the run up in share prices and higher valuations, but overall they may be more forgiving with disappointments given the improved outlook for global economies.

Interest rates

Financial market pricing has put a 55% chance on the Reserve Bank lifting rates in February. Certainly those odds look appropriate in light of the mixed economic data over the past fortnight. But as we’ve seen in the past, a lot can change in a short period of time with the job figures the main influence on market pricing over the coming week. It is also interesting to note that physical 90 day bill yields have eased markedly over 2010, dropping from 4.28% just after Christmas to around 4.13% currently.

Currencies & commodities

In 2009, the Australian dollar was the fourth strongest against the greenback of 120 currencies monitored. Of course, that means that the Aussie dollar wasn’t just higher against the US dollar but also higher against all but three currencies across the globe.

When tracking the currency, the main reference point is the greenback. But it’s worth pointing out that the Aussie dollar has lifted to 26-month highs against the Euro, is near two month highs against the Japanese yen and is also heading towards the 25-year highs that were set in October last year against the British pound. Investors have started 2010 full of confidence about the global economy, and that is translated in a firmer Aussie dollar.

Craig James is chief economist at CommSec.