Tag Archives: Banks

article 3 months old

Macquarie Group: Dead Money Or Dead Smart?

By Greg Peel

Macquarie Group's ((MQG)) first half profit result surprised analysts by coming in around 12% above guidance, albeit down 16% on last year's first half. A bit of an accounting fiddle with the MAp Group ((MAP)) stake (which is now declared “for sale”) covered most of the surprise, but the net result still beat expectations.

While the Fixed Income, Currencies & Commodities division continued to disappoint, it was the Corporate & Asset Finance division which finally brought home some bacon. Now that Macquarie's infrastructure fund business is dead and buried, it is the traditional investment banking sector businesses of broking, advising and proprietary trading which drive the ship.

And that ship has been drifting in the doldrums since Macquarie's March year-end as financial markets have range-traded to nowhere and volumes have fallen significantly from pre-GFC, during-GFC and bouncing-out-of-GFC levels. This has led to two profit warnings from management in that time – the first, at the first quarter update, maintained FY11 guidance but “only if subsequent quarters are not as quiet as the first”. The second warning came in an unscheduled update which suggested the second quarter certainly was as quiet. Guidance was lowered.

Analysts had thus braced themselves for possibly another profit downgrade at the half-year result given little evidence things have since picked up. Hence the surprise. Most recent guidance was maintained. And the Group even maintained a constant dividend payment which tends to suggest some confidence that perhaps, just maybe, the tide is turning.

It's a little early to say. Noticeably, Macquarie's US investment bank counterparts such as Morgan Stanley have posted weak quarterly results in the recent reporting season and the big commercial banks have noted weak contributions from their investment banking divisions. Only Goldman Sachs came out smelling of roses, but then it runs the world. Local analysts had every reason to assume Mac CEO Nick Moore would be back for another round of guidance reduction last Friday.

If there is one thing brokers specifically agree on, it's that the tide will definitely turn – one day. As to when that one day is, well, that's up for debate. Deutsche Bank was bold enough yesterday to suggest “We believe the first half marks the end of the downgrade cycle, and from this point we expect the upgrade cycle to begin”. Credit Suisse, on the other hand, is not prepared to post a timetable and suggests MQG shares are “dead money” until whenever the upswing begins.

The other thing all analysts agree on is that whenever that turnaround may be, Macquarie is very well leveraged to an upswing and will enjoy a rapid return to positive numbers thereafter. Currently the Group's return on equity of around 7.5% falls short of its cost of funds, while an ROE of 15% is targeted once market activity “normalises”. The reason Macquarie is so well-levered is because of its post-GFC contrarian stance.

Warren Buffet is a good example of a contrarian investor who looks to buy when companies are undervalued by the market and divest when companies become overvalued by the market. This usually means buying when others are selling and vice versa, but Buffet's investment time horizon is a long one, uninfluenced by short term fluctuations.

A good time to buy undervalued companies is in a recession, and to that end Macquarie has been flat out picking up small “bolt-on” businesses in the investment banking areas of stock broking, commodities, advisory et cetera in North America and Europe. Macquarie was forced to raise substantial fresh capital in the GFC and this is how that capital is being deployed, along with monies collected on the closure of those Mac infrastructure funds which didn't effectively close themselves.

So put simply, the longer term view is that Macquarie's profit numbers may be suffering now, but it is taking the opportunity to cheaply buy smaller businesses which have also been suffering, and in so doing expand the Group's international footprint and earnings potential ahead of the inevitable, eventual turnaround.

This is the reason four out of the seven brokers in the FNArena database covering MQG have a Buy rating on the stock, all of which were in place prior to the first half result. (The remaining three are Hold ratings.)

But there is another element one has to consider for Macquarie, which relates to the fine tightrope listed investment banks have to walk.

Listed investment banks have to keep both shareholders and staff happy, often at odds with each other. Shareholders provide the funds to allow staff to make lots of profits, but the staff are the talent which actually make the profits. Talented staff members need to be sufficiently rewarded for their achievements or they'll go elsewhere, while shareholders have to see sufficient return on their investment or they'll sell down their holdings. It is on this basis that each year's earnings have to be delicately split between staff remuneration and bonuses on the one hand and retained earnings and dividends on the other.

Analysts were expecting 45% of earnings to be paid to staff in the half but the figure was 48%. This means the staff came out better than expected, at the expense of shareholders. But Citi notes that now that Macquarie's remuneration formula is linked to ROE it is unlikely this payout level will be maintained. Citi expects a 45% net result by year-end implying only a 42% staff payout in the second half.

That sounds more comforting for shareholders, but BA-Merrill Lynch has been arguing for a while that post the GFC Macquarie's “franchise” has been slipping. Once the Millionaires Factory, Mac Bank is now just another investment bank competing in a world where highly talented staff are both limited and completely mobile. The Macquarie aura has dimmed, and recent years have seen an exodus to other global franchises offering much better bonus opportunities.

Macquarie has responded with a lot of redundancies both immediately after the GFC and gradually in the time since. Long-serving executive directors well past the bravado of youth have been quietly offered honourable discharges and farewell dinners, thus trimming down the high end of remuneration commitments. However, with each new bolt-on acquisition the Group has inherited yet more staff to more than replace the total numbers.

Citi estimates Macquarie added around 700 staff this way in the first half FY11. “Question marks remain over the Group's high rate of headcount expansion,” says Citi, “and its ability to deliver through-cycle ROEs sufficient to satisfy investors and maintain a valuation premium”.

UBS takes the argument one step further by noting that at 15,500, Macquarie's headcount is now almost half that of the world's leading investment bank Goldman Sachs yet the Group generates only one sixth of the revenue. The point is that if market activity does not pick up soon, that aforementioned delicate balance will be sorely tested.

The high headcount is currently diluting shareholder returns but at a consistent payout ratio more staff are each getting a smaller cut of the pie. UBS estimates Macquarie staff compensation levels are around 38% below the peer average now and hence a trickle of disgruntled evacuees could lead to a flood if things don't turn around significantly very soon. Shareholders might think losing a few staff might help provide more money for shareholder returns, but losing staff also means losing profit-making ability. It is the talented ones who will be lured elsewhere.

So that's where we're left. A weak year of earnings should not be a concern for the longer term investor because Macquarie Group, through selective bolt-on acquisitions, stands ready to race back into outperformance as soon as market activity gets back to something more normal. As to when this might occur...well...Deutsche Bank seems the only broker particularly calling a turnaround sooner rather than later.

However, were the turnaround to take longer than hoped, Macquarie risks losing talented staff to the opposition and in so doing it risks losing its profit-making potential.

Analysts have written off Macquarie in the past, at their peril. That's why the FNArena database shows a 4/3/0 Buy/Hold/Sell ratio with a consensus target price set more than 15% above the current trading price. But the clock is ticking.

article 3 months old

The Overnight Report: Argy-Bargy And A Flat Result

By Greg Peel

The Dow closed up 6 points while the S&P was up 0.1% at 1184 and the Nasdaq fell 0.1%.

I suggested yesterday there would probably not be a lot of movement on Wall Street ahead of tonight's mid-term elections and Wednesday's QE2 announcement and a flat close last night would tend to support that theory. However, the flat close belies the fact that at 10.30am the Dow was up 124 points and at 3.30pm it was down 58 points before closing up 6.

Morning strength was all about manufacturing. Yesterday was global manufacturing PMI day and all results were positive (except that the EU reports tonight).

Australia's manufacturing sector proved to be the only one in contraction but a rise to 49.4 in October from 47.3 in September at least showed a move in the right direction. Of more importance to the world were the Chinese numbers, and a jump to 54.7 from 53.8 again eased fears of a forced Chinese hard landing. The independent HSBC calculations were sufficiently consistent (See Chinese Manufacturers Enjoy Growth Acceleration).

The UK surprised itself with a move to 54.9 from 53.5. Following a better than expected GDP result and now a good PMI, Britons are starting to wonder what all the austerity fuss is about. Yet the winner on the day was the US with a jump to 56.9 from 54.4.

Now here comes the interesting part. The US figure was released at 10.00am (bell goes at 9.30am) so the Dow was already up on the Chinese result to again hit its April closing high of 11,205. It has found the sellers at this level about three times now and last night was no exception. The US dollar played its part and fell as stocks rose.

But then the US PMI was released and it was very good. Previously this might mean a stronger dollar on easing expectations of required QE2 and thus a pullback in stocks. But while the US dollar duly rose, so did the Dow, all the way to 11,244. This would tend to suggest Wall Street is now so convinced it knows what the QE2 package will look like that it doesn't have to respond with any uncertainty anymore.

Ah, but then the sellers began to win, and they drove the Dow all the way back to 11,150 at 11.30am where it stayed till 2.00pm. There are clearly a sufficient number of traders who, at least ahead of this week's events, believe anything above the April high is a place to take profits or even go short.

At 2pm it was announced the SEC is investigating a claim made against JP Morgan that it colluded with a hedge fund to allow improper mortgages to be included in a mortgage CDO. This is a similar claim as was made against Bank of America a couple of weeks ago and once again proves the “cockroach theory”, as was anticipated. (If you find one cockroach, you always know there's more.)

So at 2pm traders started slapping the financial stocks once more and an hour or so later the Dow was down 58 points. But here the buyers sparked into action and pretty soon we were flat again. If you'd only looked at the closing number you'd be forgiven for thinking it was a quiet night, as expected.

What Wall Street did rather ignore at the opening bell, as it focused first on the Chinese and then on the US PMIs, was that the September personal income and expenditure numbers showed a fall of 0.1% in incomes when a rise of 0.2% was expected. Spending rose by 0.2% against a 0.3% expectation.

In isolation, both numbers are disappointing. Together they imply that Americans are again dipping into their savings to purchase goods. This might be something the consumer discretionary sector can take heart in for the short term, but with 10% unemployment how long can savings be once again diminished and debt replenished? I know! Let's print a trillion more dollars and throw that at the market. That'll help! No bubbles here.

The US dollar held on to most of its gains by the close to finish up 0.3% on its index at 77.29. The Aussie thus gave back 0.3 of a cent to US$0.9861 and gold fell US$8.20 to US$1351.60/oz.

The US ten-year bond yield ticked up two basis points to 2.63%.

Commodities ignored the US dollar and focused instead on the positive global PMI numbers. Oil was up US$1.52 to US$82.95/bbl while base metals were around 1% up in London.

It was a strong day on the local bourse yesterday with the positive Chinese PMI a driver. The flat result on Wall Street will thus seem a disappointment, so the SPI Overnight was down 17 points or 0.4%.

Today in Australia there will be just the slightest doubt about the RBA rate decision meaning a few disgruntled souls will have to be at hand when the RBA announces its decision at 2.30pm which will be “no change”. Everyone else will be at lunch.

Tonight's earnings reports in the US (no we haven't forgotten earnings season) will include those from BP, Mastercard, Newmont and Pfizer (Dow). To date 70% of the S&P 500 has reported for an average 30% earnings growth compared to 24% expectation. Revenues are up 7% as expected.

The latest on tonight's midterms is that a landslide swing is expected towards the Republicans which will see them take a majority in the House. The Senate, nevertheless, is still touch and go. We do not expect to know the result at this time tomorrow.

My tip for the Cup? Good luck getting a cab in Sydney this evening.

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

article 3 months old

Australia Banking Sector Update

By Greg Peel

First up, FNArena has been receiving queries from readers as to why it is the Australian banks continue to assert that their funding costs are rising. While I have often explained this point in previous articles, it is not a surprise to receive such queries given the political frenzy being whipped up in Canberra at present with regards to the big banks.

Let me just say that Australian politics have become so pathetically popularised it makes emigration look like a worthy option. The only way to describe it is as a “dumbing down”, both in the approach taken to policy, which is mostly driven by focus groups in marginal seats, and in the quality of Australia's parliamentary representatives, as exhibited by this link.

Last week the Senate approved an inquiry into the banking industry. Having watched the above video (granted, an MP not an MLC), what hope a rational outcome?

In their weekly bank sector wraps, many analysts have pointed to interference from populist politics as being the banks' greatest concern at present, beyond even that of rising funding costs. But let's return to the latter subject.

Banks provide everything from short term business and personal loans to 25-year mortgages, such that the peak of their loan exposures into time is about 4-5 years. Banks do not match every loan they issue with an offsetting funding instrument, they simply raise funds required beyond the deposits they receive typically by issuing 5-year bonds to US or European investors funds in particular, so as to lump the offset.

They do not then wait five years and make another issue, they review their funding requirements as they go and issue further 5-year bonds. Let's just say for argument's sake they make one 5-year issue every year. This provides “rolling” funds such that each time a 5-year bond reaches maturity, another is required in its place.

The global “credit crunch” began in late 2007 and escalated to the ultimate Lehman-inspired GFC in 2008. The credit crunch came about because no one was game to lend money, particularly to banks, meaning credit spreads (the additional interest rate required to justify risk) blew out substantially. They peaked in late 2008, began to quietly subside in 2009, but then had another, smaller, jump in early 2010 when the European crisis hit. But put simply, those credit spreads were unrealistically cheap before 2007 and have since increased to levels which still reflect a certain fear element as we approach 2011. They are not likely to return to pre-2007 “cheap money” levels in a generation or more.

We are now two years out from Lehman and three from the beginnings of the credit crunch. That means Australian banks still have, as a proportion of their funding portfolios, 5-year bonds issued at very low rates. But as the 2005 issues mature to be replaced by 2010 issues, cheap 2005 rates are replaced by much higher 2010 rates. Thus the banks' net funding cost will continue to rise through time until the rates experienced in the credit crunch/GFC are from five years ago and are actually higher than today's rates. Only then will the banks' funding cost peak.

Westpac ((WBC)) has suggested that its funding cost peak will not occur until FY12 (note that I am simplifying things by assuming only 5-year issues and one each year).

Hopefully the above will explain that while bank funding costs have come down since the heady days of the GFC, there is a lag in the peak for Australian bank funding. Currently, we're still in the upswing.

Now, the Big Banks have made the case that because funding costs are rising, profit margins are falling. To stem the fall the banks must respond by finally increasing the most political of rates – the standard variable rate (SVR) on home mortgages. Elsewhere, in business and institutional loans, the banks did not drop rates as far as they did for SVRs in 2009 and have since increased them.

The ability to increase business and institutional loan rates is one reason that ANZ Bank ((ANZ)) posted a strong result last week. ANZ's margin actually increased by five basis points when National Bank's ((NAB)) equivalent margin fell. It is expected Westpac will also report a fall in margins in its full-year result due on Wednesday. But the major reason for ANZ's outperformance was quite simply the NZ in ANZ. The bank has been able to happily increase its loan rates, including SVRs, in New Zealand. Without political interference.

ANZ also has an advantage over its Big Bank peers via its Asian expansion strategy. Loan rates in Asia have also not been met with attacks from Comrade Joe equivalents, and Asia has proven a valuable source of new deposits for ANZ at a time when its peers are fighting a heated, competitive battle locally for deposits.

It is this comparison of ANZ loans and deposits versus NAB loans and deposits which provided the highlight after both reported their full-year results last week. While both saw profit increases in the order of about 50% over last year's results, bank analysts were forced to increase their FY11 earnings forecasts for ANZ but reduce their NAB forecasts. NAB may be building a solid base for future years, but its result featured a greater rise in costs than revenues, while ANZ is simply firing on all cylinders right now.

The obvious man-on-the-street point of confusion here is: how can the banks increase their profit by 50% and then cry poor on funding, such that SVRs need to go up? How much money do they need? And it is exactly this naïve (in the true sense of the word) response that provides fodder for populist, and largely ignorant, politicians. Why do this year's profit performances look so good compared to last year? Because last year's were so bad, that's why.

In bank year FY09 (ending September), Australian banks were forced to raise capital, cut dividends and shift vast amounts of earnings into provisions against the bad debt wave assumed to be ahead, as well as general provisions against ongoing global disaster. What little earnings were left over, they declared as profit.

In bank year FY10, not only did banks see strong government stimulus-based mortgage demand, but the Australian economy has fared pretty well. Unemployment is much lower than it was ever expected to be at this time, meaning the risk of bad debts is much diminished. On that basis, not only is it not hard for FY10 profits to look a lot better than FY09, but much of those provisions have been reinstated as earnings, that is, profit declared this year. The banks have also lifted their dividends payouts back up towards previous levels, but most importantly if one were to net the FY09-FY10 results one would find that FY10's 50% jumps are not really that spectacular at all. A lot of it is just provisions coming back.

Hence we do not have a situation where ridiculously rich banks are crying poor over funding costs at the expense of the Australian everyman.

And that is exactly what the Senate inquiry will find, once it is fully explained. However, that does not mean the ongoing arguments over bank fees cannot persist despite strict reductions over the past year. As the Macquarie bank analysts put it:

“We believe it is unlikely that we will see controls placed on interest rates charged or paid by banks, but fees remain a fertile ground for political agendas”.

To sum up the NAB and ANZ results, analysts were largely in agreement that NAB had built a solid base from which it would bounce back once local business loan demand bottomed out and started rising again. However, this will take longer than previously assumed so patience is required. For ANZ, it was a case of marvelling at the bank's contrary margin movement (meaning up, not down like everyone else) but wondering whether that gap can be maintained.

For example, since March 2008 notes UBS, local bank sector margins have expended by 7 basis points (now in a downward trend) while ANZ's have increased by 51 basis points. Never before has one major sustained such a high level over its peers. UBS is thus assuming that gap can only now reverse, and ANZ management itself has suggested institutional loan margins appear to have peaked.

On the other hand, Deutsche Bank says “We see little risk of ANZ margins normalising to the peer average”.

Either way, bank analysts mostly agreed that the re-rating of ANZ which has occurred in recent months, mostly at the expense of the more mortgage-laden Westpac and Commonwealth ((CBA)) banks, is not only justifiable but perhaps still too lean. For NAB, forecasts depend entirely on exactly when the various bank analysts see the long awaited turnaround in business lending occurring, and just how “V-shaped” that bounce will be. For the most part, analysts are confident.

Which brings us to Friday's September private sector credit data released by the RBA.

At 0.1% net growth, private credit demand disappointed and provided plenty of room for the RBA not to raise tomorrow. Within the result, housing demand grew 0.6% but business demand fell 0.9%. Annualised housing credit demand is running at plus 0.8% so September suggested a slowing in trend, while annualised business credit demand is minus 3.7% and has been negative ever since the GFC.

Not a lot of reason to believe this Holy Grail of a bounce in business credit is just around the corner. The good news, nevertheless, is that business demand growth is quietly becoming less negative, so the trend shows a bottom is near. However, it's a bit like turning around the QE2 (the ship, not the other one). It will still be a long haul towards improved earnings in the business sector for the banks, one presumes.

And that brings us back to SVRs. If it's not enough for business credit to be slow, and funding costs to be on the rise, a good proportion of bank analyst valuations at present for the Big Banks assumes a level of “asset repricing”, which is another way of saying it is assumed the banks will increase their SVRs by more than the RBA cash rate increases, or that they will independently increase their SVRs if the RBA sits tight.

Are the banks honestly game enough to do this (particularly totally independent increases) in the current political climate? Maybe once upon a time the banks could thumb their noses at politicians and and tell them to keep out of the free market, but we mustn't forget the banks are still subject to the long process of post-GFC regulatory review, irrespective of knee-jerk Senate shenanigans. It's not a good idea to upset the regulators, or those who pay the regulators' wages, during a review which is most likely to impact on profitability.

RBS Australia has run some numbers on what the impact on the analysts' FY11 profit forecasts would be if they didn't add an extra 15 basis points to SVRs independently. CBA's would be trimmed by 4.8%, Westpac by 4.5%, ANZ by 2.8% and NAB by 3.7%.

And that's why, as suggested at the beginning of this article, the greatest risk to bank share prices at present is not necessarily rising funding costs, or a slow business credit turnaround, or an easing in mortgage demand. It is quite simply politics.

article 3 months old

The Overnight Report: Jostling For Position

By Greg Peel

The Dow closed down 12 points or 0.1% while the S&P rose 0.1% to 1183 and the Nasdaq rose 0.1%.

A funny thing happened yesterday. The Bank of Japan left its rate on hold which was of no surprise given the cut from 0.1% to zero the previous month. But the BoJ announced it was moving the date of its next meeting from the scheduled November 15-16 forward to November 4-5. The Fed makes its QE2 announcement on the third.

What are we to glean from this? Scenario One: the BoJ has no idea what the Fed is about to do so just in case the QE2 decision proves devastating for the yen (in this case, pushes it way higher) the board has called an emergency meeting so it can act swiftly. Scenario Two: the BoJ has been on the phone to Ben Bernanke who, in the spirit of central bank hands across the water, has informed the board on exactly what will be announced on the third but asked the BoJ not to give the game away. So in the latter case the BoJ knows exactly what it needs to do but won't do anything ahead of the Fed.

Fascinating. I'd favour Scenario Two and suggest the BoJ is readying to intervene to cap the yen when it shoots up on a larger than expected QE2 announcement. Because if it were a smaller than expected QE2 announcement the BoJ would not need to intervene at all. Or maybe I'm being double-bluffed. Who knows?

Wall Street certainly doesn't. As we enter the last five minutes of the last hour of the seemingly interminable Age of Man known as The Wait For QE2, the jostling in markets overnight suggests little more than preparatory positioning or squaring. Two trends have been apparent recently – one is that if the US dollar goes down stock go up and vice versa and the other is that longer US bonds have been quietly losing favour to shorter US bonds. The ten-year yield has gradually risen from under 2.4% when QE2 speculation was fervent to over 2.7% as QE2 approaches (may not sound like much but the US bond market is far and away the biggest financial market in the world so every basis point is worth a bundle).

On Wednesday night, the US dollar bounced following speculation from a Wall Street Journal article that QE2 will be smaller than expected. Last night that article was quickly dismissed. The US dollar was sold down a full 1% to 77.30, even in the face of more sovereign debt rumblings out of Ireland.

The US ten-year bond yield reversed its latest trend and dropped six basis points to 2.67%. The weak five-year Treasury bond auction of Wednesday was last night overturned by solid demand for the US$29bn of seven-years on offer. The 1.97% settlement was lower than traders had anticipated and foreign central banks retained their 50% buying average.

Despite the dollar crunch, the stock market did not rally. It did jump 50 points early after weekly new jobless claims came in at a drop of 21,000 when a rise of 3,000 was expected (third drop in a row) but it ultimately closed flat.

There were no other economic data points of interest last night and earnings reports were again mixed, with a good result from Exxon (Dow) offset by a weak result from 3M (Dow). (Note: Microsoft (Dow) posted a strong result after the bell and is up 2% in the after-market).

The stock market (as measured by the S&P 500) has been relatively flat all this week on a close-to-close basis, and with QE2 looming next Wednesday it appears not even a 1% drop in the dollar can affect any bold risk-taking.

Commodity markets were also flat last night, with oil up US24c to US$82.18/bbl and London base metals mixed on small moves.

Gold, on the other hand, went with the dollar in rising US$18.50 to US$1343.90/oz to more than reverse Wednesday night's drop. Silver was up 2%. The Aussie clawed back 0.6 of a cent to US$0.9788.

So it would seem the QE2 positioning is all now happening in the financial markets while equity and commodity markets are squaring up.

What we now have by way of QE2 speculation is that the two camps – less and more – are converging. The suggestion is the Fed will announce only US$250-500bn of QE on Wednesday to be implemented over the next few months, but that eventually the Fed will implement a total of US$2 trillion in stimulus. The latter figure is unlikely to be articulated if it is accurate. On that basis, even a US$250bn announcement does not have to be disappointment for the market if Wall Street feels that the longest journey begins with the first step.

The problem is, if the Fed does announce only a small initial package and suggests more will come if necessary we will continue to trade amidst a cloud of uncertainty. Every single economic data release will see the markets swing back and forward as QE2 speculation rolls on. Please Mr Bernanke, just give us the whole story so we can get on with life.

What does the Bank of Japan know?

What does Glenn Stevens know? He has to make a rate decision on the Tuesday before the Wednesday of the Fed meeting. However, the weak Q3 CPI reading this week has likely provided sufficient breathing space for the RBA, the Aussie is helping to cap inflation in Q4, sovereign debt issues are again simmering in Europe, and we still don't know whether the Australian banks will go it alone next week. (Except that the public frenzy is being whipped up by the idiots in Canberra, talk of an inquiry from Senators who likely wouldn't know how one run a chook raffle let alone a bank, and a supposed investigation from the ACCC – the very same organisation that never blinked when Westpac took St George and CBA took BankWest, thus allowing two banks to accumulate 75% of all Australian mortgages – may well have scared the banks off.)

There will be no rate rise on Tuesday.

The SPI Overnight was down 6 points.

Tonight in the US the first estimate of September quarter GDP will be released. Previous expectations of 1.9% growth appear to have given way to a 2.1% consensus. Unless the number is substantially different, it won't affect the decision the Fed no doubt already knows it will announce on Wednesday. Dow components Chevron and Merck will report tonight.

In Australia we have a round of data today which might otherwise interest the RBA, but probably not enough to make any rash decisions ahead of the Fed. We have private sector credit, new home sales and the RP Data-Rismark monthly house price index.

Another point to note from last night: Potash Corp posted a strong profit result, allowing the board to thumb its nose at BHP Billiton ((BHP)) and reiterate that BHP's offer undervalues the company.

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

article 3 months old

Oz Rate Hike Pressure Eases

By Greg Peel

Economists had mostly been expecting a 25 basis point RBA rate rise in October given a much stronger than expected reading on June quarter GDP growth and a surprisingly tight employment market. They were subsequently surprised when the RBA held fast, with ongoing North Atlantic economic concerns the major reason.

Expectations nevertheless moved swiftly to suggest a November rate rise was as good as in the bag, at least until the RBA began to suggest the strong Aussie dollar was doing some of its disinflationary work anyway. This tempered the mood somewhat, but all along economists knew the RBA's decision would come down to the crucial September quarter inflation readings.

Monday's producer price index reading was much stronger than anticipated, so the Cup Day rate rise odds tightened once more. Drums then rolled as the consumer price index was released at 11.30am this morning.

Shock horror! The headline CPI increase for the September quarter came in at only 0.7% when 0.8% was expected. Annual headline inflation fell to 2.8% from 3.3% in the June quarter.

More importantly, the RBA's average trimmed mean calculation showed a jump of only 0.55% when 0.7% was pencilled in by economists. This is up from June's reading of 0.5% in quarter-on-quarter growth, suggesting a turning of the tide, but the annual mean rate of growth fell to 2.4% from 2.7%.

That's now comfortably inside the RBA's 2-3% target band.

The upshot is that economists still feel the tightening labour market, which is applying inflationary pressure, will eventually force the RBA's hand. ANZ economists had been relatively convinced of a November hike previously and, after today, still suggest a November hike cannot be ruled out, but they are now leaning towards December. A Cup Day rate hike following a weaker than expected CPI result offers “presentational issues”, suggests ANZ, which is a nice way of saying Glenn Stevens might well be lynched were he to slap a mortgage rate increase on home owners just before the jump.

ANZ bases its still hawkish views on past experience. In the prior “commodity boom” which preceded Lehman, two consecutive quarter on quarter CPI readings of 0.5% on the RBA's measure were registered, lulling the central bank into a false sense of security. But the next quarter saw a 1.0% jump which took the annual rate to 4.0% and sent the RBA board scrambling.

Stevens has thus been at pains to imply recently that the central bank does not want to be caught out again, such that a preemptive strike on inflation will be called for before things get out of hand once more. But it's still unclear now as to just when that strike may be.

CommSec's Craig James called the CPI result “another set of beautiful numbers”, and being among the more dovish of economists he now suggests the RBA would be hard pressed to justify a rate hike before February.

James implies he believes the RBA had become just a little too paranoid on Australia economic growth expectations and he attributes an Australian consumer much less inclined now to lash out on discretionary items as the swing factor. The CPI numbers give the RBA an opportunity to wait a little longer, says James.

The next question is: where does this leave the banks?

Analysts have been assuming the banks will simply have to hike their mortgage rates independently of the RBA given rising funding costs, and bank executives have also been discretely dropping hints. But having not done so thus far, the assumption has been the banks were waiting to move under cover of an RBA rate hike and simply add 10-15 basis points to the RBA's 25.

Such plans were scuppered in October, and now they may well be scuppered in November as well. Does this mean the banks continue to hold off or will they now just be forced to go it alone?

If Stevens is to be lynched for raising rates next week, were he to do so, National Bank ((NAB)) executives would be hunted down and unceremoniously shot for doing so independently following today's better than expected full-year profit result. Wayne Swan would carry the torch for a team of pitchfork wielders on one side, and Comrade Joe would stage-manage a similar posse from the other. And up the middle would come battling Aussie mortgage holders.

A decision by the banks to independently raise rates nevertheless has little to do with local inflation and everything to do with offshore five-year funding costs which are rising steadily as we move further beyond pre-GFC cheap money. Bank analysts are putting a lot of stock in “asset repricing”, as they call it, in their FY11 bank earnings forecasts. NAB may have delivered a cracker but a failure to raise rates may see analysts applying valuation offsets.

article 3 months old

The ASX, The National Interest And The Hung Parliament

By Greg Peel

The Singapore Exchange (SGX) has made a cash and scrip offer for the Australian Securities Exchange ((ASX)) which represents an all-cash equivalent of $48. That's a 37% premium to the ASX's last traded price before the halt and a 45% premium to its six-month volume-weighted average price.

Despite the fact the SGX has told its shareholders the deal will be some 20% earnings accretive for them, analysts agree it's still a cracker of a deal for ASX shareholders as well, at least in terms of the cash equivalent premium. Let's face it, prior to rumours beginning last month about a possible takeover afoot, ASX shares had been wallowing in a pit of uncertainty based on depressed turnover volumes and the threat of newly approved competition (first up, Chi-X) to its previously ridiculous and arguably unlawful monopoly.

From whence were ASX shares ever going to derive a positive catalyst in the short to medium term? It might have taken years before a 40% rally could be achieved.

So on that basis, the SGX offer is a gift from above. Or at least from the north. However, it's not that simple.

Firstly, cash represents only 46% of the offer (fixing closing prices at the offer date) which means ASX shareholders are also being asked to take on the risk of shares in the new combined entity. Synergies expected by the parties amount to only 9% in costs given the two exchanges do have some differing technologies and are going to run as effectively two shops anyway, just as they are now. Any ongoing value comes from whether one sees strength in Asia-Pacific numbers of two linked exchanges, which the parties offer as 7-14% revenue based synergies. China might be the economic miracle but little Singapore has also been going from strength to strength recently as an important financial centre.

However, in taking on combined shares, ASX shareholders are also exposing themselves to a much higher level of gearing, along with the risk of whether those revenue synergies are achievable. Analysts are not necessarily in agreement on whether 46% cash is sufficient trade-off for these risks or not.

(Note also that the SGX and ASX tried a tie-up of sorts a few years back, which mostly amounted to allowing Australian investors direct access to Singapore-listed stocks. The deal flopped due to lack of investor interest).

JP Morgan is definitive, suggesting that on the deal metrics alone ASX shareholders would be better to take the money and run (meaning sell out of ASX ahead of any transaction) rather than take on the new shares. It has today downgraded ASX from Overweight to Neutral.

Credit Suisse, on the other hand, upgraded its previous Underperform rating on ASX to Neutral given its 75% expectation the deal will go through.

But that's where the fun starts.

Under recently ratified rules, any Australian listed company deemed to be “in the national interest” is subject to a 15% restriction on foreign ownership. The ratification came recently given a flood of Chinese attempts to raid Australian resource stocks (think OZ Minerals) and their existing projects, but it also applies to companies such as monopoly carrier Qantas ((QAN)) and monopoly infrastructure owner Telstra ((TLS)). As noted, the ASX was a monopoly.

But it's not now. Since the ASX had its regulatory oversight powers removed and handed to ASIC, and since regulatory changes have allowed for the entry of competition, the ASX is no longer a monopoly as an exchange. It does, however, still have a monopoly on clearing house and settlement infrastructure. Macquarie notes that when OMX recently merged with the NASDAQ and EuroNext with the NYSE, in each case unique components of European payments architecture were not sold.

Hence we may have hit a hurdle on a “national interest” basis. Another hurdle is that SGX is 23% owned by Temasek which is Singapore's state-owned sovereign fund. The real problem with Chinese takeover attempts, as far as the government was concerned, was that the suitors were fully or partially state-owned. Put these two problems together and perhaps one can make a case against national interest.

But can the government really take away the ASX's monopoly on the one hand, by allowing competition, and on the other block a takeover on a “national interest basis”? It would seem a tad contradictory, but then it is regulators and politicians we're talking about.

And that's where the fun really starts.

Aside from the relevant Singapore authority and ASIC needing to approve the deal, the Foreign Investment Review Board must assess before the Treasurer himself weighs in with a right to block. Let's say both give the thumbs up. In order for the deal to then proceed, a special amendment would have to be made to the 15% limit legislation, and such an amendment would need to be voted on in parliament.

Oh my God. You can just hear them already, can't you? This disparate and “hung” bunch of self-serving, back-stabbing, mostly pig-ignorant political animals might be charged with the task of reaching a sensible decision on the deal. Yeah right.

The Opposition, which works solely on the basis of “if they say white, we say black”, will await the Treasurer's (and thus by proxy the government's) decision and then scream blue murder in the opposite direction. If it's a yea, Comrade Hockey will waste no time in taking every opportunity to harrumph and snort and generally carry on without the slightest clue, and Malcolm Turnbull will demand a cost-benefit analysis. If it's a nay, the Coalition will no doubt suddenly become dedicated free market capitalists again. And all of that's predicated on the government making a sensible decision in the first place.

The rural independents will have some problem with listed agricultural stocks, the Greens will question the carbon footprint of such a deal, and Bob Katter specifically will say something unintelligible. There will be arguments back and forward across the floor with no resolution until every electorate gets a new toilet block in return or parliament breaks for Christmas, in which case it will all start again next year.

Analysts agree there are many hurdles to the ultimate approval of an ASX-SGX merger. Parliament is surely the greatest hurdle, and its attitude completely unpredictable.

Which tends to suggest JP Morgan has the right idea. The problem is, despite the $48 equivalent value of the offer ASX shares managed only to rise above $42 on re-open yesterday and have already fallen 4% this morning to under $40 in an otherwise flat market.

Given the shares were trading under $36 before the announcement, does one thank the gift horse and be happy or hang on to see what might transpire?

Not all FNArena database brokers have provided fresh reports on ASX today so we currently have 3/2/1 Buy/Hold/Sell ratio from those recently updating their ratings (Citi and Deutsche Bank have been quiet nearly all year). The consensus target price has moved up, but only from $35.57 to $39.75.

Credit Suisse is the only broker which has raised its target to match the equivalent $48 bid, while Macquarie is clearly exhibiting its scepticism on such a deal going through (and its otherwise low rating of ASX as an investment) by maintaining an Underperform rating and a target of only $26.15, which impacts heavily on that consensus figure. Without Macquarie consensus would be $43.22.

Goldman Sachs is in the Hold camp with a target of $41.75.

article 3 months old

The Overnight Report: April High Again Proves Resistant

By Greg Peel

The Dow closed up 31 points or 0.3% while the S&P added 0.2% to 1185 and the Nasdaq rose 0.5%.

From the opening bell last night the Dow rapidly rose 115 points to 11,247 - a point which exceeded the previous April closing high of 11,205. Had Wall Street held the gain the Dow would have registered a new two-year high and thus its highest level since Lehman. But alas.

Clearly the April peak is now staunch resistance for the market and while the Dow fell back ultimately to 11,164 on a late selling wave, the broad market S&P 500's close of 1185 suggests another 2.7% gain required to reach its April closing peak of 1217.

Wall Street was heartened, if not completely comforted, by the news over the weekend that the G20 finance ministers had agreed to keep trade balances in check to avoid further currency battles. But without specific metrics, many found the agreement hollow. Perhaps more could be made of the emerging countries' greater representation on the IMF (See: The Beginning of the End of the Currency War?).

What really provided the early boost on Wall Street was a surprise 10% jump in sales of existing homes in September to 4.53m. Economists were expecting 4.39m. Mind you, that's where the good news ends.

September 2009 was a month in which existing home sales were surging, driven by government tax credit stimulus. September 2010's number was 19% below this figure, and month on month the median home price fell 2.4% to US$171,700 (about the price of a Sydney phone box). Lower prices have been credited for the jump in sales, and distressed sales represented 35%. That figure was 34% in August and 29% in September 2009.

This is not the stuff of a clear housing recovery, and all the while US bank share prices have been slowly sinking on ongoing concerns over mismanaged foreclosures and misrepresented CDO law suits. Analysts now suggest, nevertheless, that recent weakness is overdone.

Meanwhile the Chicago Fed national activity index fell to minus 0.58 in September from minus 0.49 in August. This zero-neutral index never gets much higher than plus one and hit minus 4 as we entered 2009.

Not a lot in the above to suggest the Fed might change its mind about QE2 at the eleventh hour.

Mondays are not big reporting days in the earnings season but small after-market losses are being felt by pharma giant Amgen and semiconductor leader Texas Instruments. Tonight's highlights include Ford (Dow), Swiss investment bank UBS, US Steel (Dow) and Western Union.

Having squared up ahead of the G20 meeting, traders went back to selling the US dollar last night to push it down 0.3% on its index to 77.15. The Aussie, on the other hand, rocketed back a cent to US$0.9912.

The Aussie's jump occurred in local time yesterday on the release of the third quarter producer price index which at 1.3% up on the headline, blew away expectations of a 0.5% jump. Rising producer prices tend to be a precursor for rising consumer prices, albeit possibly with a lag, but then margin movements mean the PPI-CPI relationship is not always cut and dried. Nevertheless, the market took the number as sufficient confirmation the RBA will be forced to raise on Cup Day.

This will be interesting. If Wednesday's CPI figure is as much as a surprise as the PPI figure we might just see parity. At what point above parity does the RBA decide not to raise, given the disinflationary effect of a strong Aussie? And if it doesn't, where will the Aussie fall to? Over there's a rock and over there somewhat of a hard place.

The weaker greenback led unsurprisingly to standard commodity price movements, with gold up US$11.40 to US$1339.40/oz, oil up US83c to US$82.52/bbl, and base metals all up 1-2% in London.

After the ASX ((ASX)) takeover-inspired surge on the local bourse yesterday, the SPI Overnight was down 18 points or 0.4%.

NAB will release the September quarter summary of its business confidence survey today while tonight in the US sees more house price data, consumer confidence, and the first of this week's US Treasury bond auctions.

Tonight will also represent one week out from the US mid-term elections. It is currently assumed Wall Street has “baked in” a return to Republican majority in the House, but the jury is still out on whether or not the GOP can also take the Senate. How long will it take to count the votes? The next day is QE2 day.

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

article 3 months old

The Monday Report

By Greg Peel

A week ago saw meetings of the IMF, World Bank, G7 and G20 at which no resolution on the world's current Currency War was reached. However, the War had never been an intended agenda item. Over the weekend however, the G20 finance ministers met in South Korea and this time currency was a major issue.

No one ever expects much in the way of concrete decision making at a G20 meeting, and this one didn't disappoint. As the Wall Street Journal put it:

“The Group of 20 nations are pursuing an accord to end battles over currencies that relies on goodwill and peer pressure to persuade countries to comply with internationally agreed norms rather than enforceable sanctions.”

Sir Humphrey Appleby would have been proud.

The ministers agreed to maintain trade balances at “sustainable levels” as determined by yet to be decided upon “indicative guidelines” which the IMF would then umpire. The ongoing global joke is, of course, that most of the hot air is coming out of the US camp. Secretary Geithner pushed for specific limits on trade balances and again harassed China over currency revaluation all the while knowing the Fed is about to force upon the world potentially extensive reserve currency devaluation in the form of QE2. There's one rule for America and another for everybody else.

Despite not expecting any G20 bombshells, markets were quiet in Friday night trade just in case. There were no US economic data releases to ponder which left share price movements up to earnings reports, and they were mixed. The end result was a Dow off 14 points or 0.1%, a Nasdaq up 0.8%, and an S&P splitting the difference with a 0.2% gain to 1183. Currency markets failed to respond to an unexpected rise in Germany's IFO business climate index. 

The US dollar index was steady at 77.41 and the Aussie ticked up a bit to US$0.9808. Gold was steady at US$1328.00/oz while base metals were mostly steady too, albeit lead and zinc shot up 2-3% on news of the closure of a Chinese smelter.

Crude oil rose US$1.13 to US$81.69/bbl, dragged up by gasoline and diesel prices which tightened due to announced strikes in France.

The SPI Overnight lost 4 points.

With a third of the companies in the S&P 500 now having reported, 75% have beat earnings forecasts. This has helped the US stock market to a third consecutive week of gains, supported by a safety net of QE2 expectation. More earnings reports will flow this week but we still have to wait until the middle of next week for the FOMC meeting and anticipated QE2 announcement. Hands up anybody else who's sick of waiting.

Housing will be in the frame in the US this week. Tonight sees existing home sales along with the Chicago Fed national activity index, Tuesday sees both the Case-Shiller and FHFA house price indices along with the Conference Board consumer confidence survey, and Wednesday brings new home sales along with durable goods orders.

Friday will be the biggie, as along with the Chicago region PMI and the Michigan Uni fortnightly consumer confidence survey will be the first estimate of US third quarter GDP. The first estimate measures GDP growth in the first month of the quarter – July in this case – and extrapolates a quarterly result. The consensus estimate currently sits at 1.9% growth and the Fed will be keeping a close eye before its meeting the following week.

Here's a question: Can Glenn Stevens get on the phone to Ben Bernanke some time before Melbourne Cup Day and ask him straight out what level of QE2 he intends to announce on the day after? Were that announcement to surprise the market to the upside, which would require, say, US$1.5 trillion of QE2 rather than the US$500bn being currently touted, it is quite possible the Aussie dollar may well shoot through parity and beyond. 

An Aussie shooting through parity and looking like it will stay there acts as a natural hedge against inflation, as the RBA specifically pointed out in the minutes of its last meeting. This would take the pressure off any need for a local rate rise on the Tuesday, notwithstanding the expectation that banks will raise their mortgage rates anyway being another reason why the RBA may hold steady once more.

Inside information swapping amongst central bankers aside, this week is inflation week in Australia with the third quarter producer price index due out today and the consumer price index on Wednesday. The key will not be the headline CPI, but the RBA's trimmed mean which will need to stay under 3% if the RBA is to decide to hold fast. That in itself is not a guarantee, however. We may learn a little more about the way Stevens is leaning today given he is due to speak in Canberra.

We will also learn the NAB business confidence assessment for the third quarter on Tuesday and the Conference Board leading economic index on Thursday. Friday will be important for the RBA, given new home sales and the RP Data-Rismark house price index are released along with September private sector credit growth (or lack thereof).

It will be a crucial week for Japan this week given a raft of economic data releases and a Bank of Japan monetary policy decision due at a time when the yen is again under severe upward pressure against the US dollar. Thursday will also see a rate decision in New Zealand.

On the local stock front, there are about a million AGMs being held this week and a few leftover resource sector quarterly production reports. It will also be a crucial week for the banks.

ANZ Bank ((ANZ)) reports its full-year earnings on Wednesday followed by National Bank ((NAB)) on Thursday. Westpac's ((WBC)) result is due the day after the Cup and RBA meeting while Macquarie Group ((MQG)) will report its half-year result this Friday. If ANZ and NAB announce cracker bottom line profits (regardless of comparison to analyst forecasts) then the public backlash over any accompanying or subsequent mortgage rate increases will be severe. 

For further global economic release dates and local company events please refer to the FNArena Calendar.

article 3 months old

The Overnight Report: All Is Forgiven

By Greg Peel

The Dow rebounded by 129 points or 1.2% while the S&P rose 1.0% to 1178 and the Nasdaq rose 0.8%.

Rate hike? What Chinese rate hike? It would appear that with a bit of time to think things through, Wall Street decided last night that a Chinese rate hike is not the end of the world. The significant bounce in the US dollar on Tuesday night was all about short-covering in an overstretched market, and there are few who don't believe the dollar is overdue a correction in its secular shift to the downside.

With time to ponder, currency traders would have realised that a rate hike in China means Beijing is putting pressure on itself to revalue its currency and that the confidence shown by the hike likely suggests a revaluation of the renminbi is not far behind. A move up in the renminbi against the dollar simply means the dollar moves down.

And move down it did last night, by 1.3% in its index to 77.21. If you'd been in a coma for two days you wouldn't notice any difference. The Aussie also spun around, regaining 1.7 cents to US$0.9863. And the yen is once again approaching its highest level on record since floating around 40 years ago.

Commodities also rebounded, although not quite as dramatically as they fell on Tuesday night. Gold recovered US$10.50 (UD$1344.00/oz) of the US$40 fall that probably put a few frighteners through the weaker retail positions. Silver (US$23.89/oz) regained about half its one dollar loss.

Aluminium and copper took back around 1% after a 3% fall on Tuesday while the other base metals all rebounded by 3%. Oil recovered by US$2.28 to US$81.77/bbl.

So with order restored, Wall Street could once again focus on the earnings season.

In the financial sector, the two major releases were juxtaposed. Morgan Stanley suffered from what we might now call the “Macquarie factor” in that being mostly an investment bank, it wallowed in a lack of volume and activity during the quarter and saw a 67% drop in profit. Funnily enough however, Goldman Sachs is in the same game but on Tuesday released a cracker of a result. It helps if you run the world.

Wells Fargo, which is more of a commercial bank, posted a record profit.

On the subject of financial stocks, to return to the “thinking it though” theme it was clear as bank stocks rebounded last night that Wall Street now realises the law suits being brought regarding dodgy CDOs will not bring down the sector.

The highlight of last night's releases nevertheless came from the airline sector. Boeing (Dow) did well but five airlines all did well, including AMR (American Airlines) which posted its first profit in two years and jumped 11%.

United Technologies (Dow) added to the excitement while after the bell, eBay surprised to the upside and is up 6% in the after-market.

It's a rule of thumb that if transports are doing well then the economy's doing well, and if the world's biggest online auction house is thriving then surely the US (and global) consumer can't be dead? Is quantitative easing really necessary?

That question was further raised on the release of the Fed's Beige Book last night – its anecdotal six-week survey of economic activity in each of the twelve Fed regions.

If anything, this Beige Book was a mild “upgrade” from the last. The previous report was quite downbeat, noting a definite slowing across most regions, but this one at least had manufacturing looking okay, retail sales modest and housing stable. Yet the Fed also noted a reluctance to hire, which leads to the heart of the unemployment problem, and feared that one more shock to the system could send wages and prices on a downward spiral, ie deflation.

There was thus nothing in the Beige Book to change market expectations on QE2. Wall Street has factored in, it would seem, US$500bn of freshly printed dollars which may well come in the form of US$100bn tranches each six-week cycle depending on a running report card. This announcement is due on November 3.

The “baked in” nature of QE2 continues to be exhibited by the bond market, which was relatively steady last night. The bond market did not react at all to the panic of Tuesday but it seems unlikely the ten-year yield can fall that much lower given the extent of bond positions held.

The SPI Overnight recovered 24 points or 0.5%.

Earnings releases tonight in the US include Amazon, American Express (Dow), AT&T (Dow), Caterpillar (Dow), Credit Suisse, Freeport McMoran, McDonalds (Dow), Travelers (Dow), Union Pacific and United Parcel Service.

Ahead of those, however, it's a big day in China. The monthly round of inflation, investment, retail sales and industrial production data will be released but so too will third quarter GDP be revealed. Consensus is for 9.5% growth, down from 10.3% in the second quarter.

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

article 3 months old

Oz Consumer Spending Trending Higher

By Chris Shaw

Signs are emerging Australian consumer spending is beginning to stage a recovery, as the Commonwealth Bank Business Sales Indicator (BSI) has now risen in successive months. The BSI tracks the value of all credit and debit card transactions processed through Commonwealth Bank merchant facilities. As such, it could be regarded a key gauge of economy-wide spending.

For September the BSI rose by 0.2%, which followed a 0.1% rise in August. This marks the first successive monthly increases for 10 months. In trend terms the value of spending transactions fell in only four of 20 industries in September, an improvement from August when spending declined in five sectors. Business services was the strongest gainer in September with transactions rising by 1.5%, followed by a 1.2% gain in hotels and motels.

Only Victoria and the Australian Capital Territory reported negative monthly trend growth in September, while spending was strongest in New South Wales and Western Australia. In annual terms spending growth was strongest in WA and the Northern Territory and weakest in Victoria and Queensland.

CommSec chief economist Craig James suggests the BSI outcome is good news for businesses as it indicates a loosening of consumer purse strings. In James's view, this trend should continue if the Reserve Bank of Australia (RBA) stays on the sidelines with respect to interest rates, as this would increase the confidence of consumers with respect to lifting their spending.

The September BSI data support the RBA decision to leave rates on hold in October according to James, as it shows the domestic economy remains soft. This means the case for a rate hike last month wasn't proven beyond any doubt, while market pricing suggests there is only a 40% chance of a rate increase in November.

James notes despite the increase in the BSI over the past two months, the index is still well below year ago levels, having contracted by 3.0% in trend terms over this period. The BSI has underperformed the Australian Bureau of Statistics narrower retail trade series in the past six months in particular, highlighting the economy wide weakness in spending over the past year or more.

According to James, the recent modest recovery in spending reflects more fundamental factors such as stronger balance sheets and a firmer job market. The encouraging element of the data, in James's view, is that the spending pick-up has been broadly based, which implies no signs of a two-speed recovery in spending in Australia.

The fact BSI data have been weak over the past 12 months fits in with research by online data analysis group Datamonitor, which shows Australian consumers in the past year have made a greater effort to repay their credit card debts in full.

Datamonitor's research on Australian credit card customers shows 48.43% of consumers paid no interest on their credit cards in the past 12 months, up from 40.23% in 2009 and 39.07% in 2008.

In the view of Datamonitor's senior analyst Harry Senlitonga, this shift in consumer behaviour with respect to credit cards means a potential loss of revenue for Australian credit card issuers in the form of lower interest income.

If this trend continues Senlitonga suggests there could be a review of credit card prices across the industry. One possible outcome could be a fee income model, as such a model may prove to be more stable while also more profitable for card issuers.

Senlitonga also expects the trend towards paying less credit card interest is likely to spark further innovation in the market. One likely outcome in Senlitonga's view is for products designed specifically to target specific customer segments.