News Article | May 8, 2017
SYDNEY, Australia — A fierce price war among retailers is threatening to keep a lid on improving inflation in Australia, compounding the problems of policymakers struggling to support still-weak domestic demand. An uptick in consumer inflation has lowered the chance of another rate cut this year, but competition from global retailers such as Amazon.com Inc is set to keep prices under pressure — good news for shoppers but worrying for the central bank. The country's biggest retailers are suffering from a long spell of deflation that is unlikely to subside soon. Amazon and German supermarket chain Kaufland want to fortify their global presence Down Under and will join recent entrants such as H&M , Uniqlo and Aldi. The Reserve Bank of Australia (RBA) said on Friday that "heightened competitive pressures" in the retail sector were among key factors keeping inflation subdued. "The arrival of further new foreign retailers will be an important influence on final retail prices over the next few years," the RBA said in its quarterly statement on monetary policy in which it expects underlying inflation may only fully return to its 2-3 percent target band by mid-2019. Worried about deflation risks, the RBA slashed rates twice last year to a record low 1.50 percent. It is widely expected to hold rates until mid-2018 but subdued consumer prices could become a trigger for a move lower, and push the Australian dollar weaker. "While consumers will benefit from lower prices, ongoing weakness in retail inflation is a key factor weighing on the broader inflation outlook," said ANZ economist Jo Masters. There was some relief headline consumer prices rose in the first quarter, taking the annual pace to its fastest since 2014 at 2.1 percent. But five of 11 sectors — about 30 percent of the CPI basket — saw price falls. Prices for women's clothing, for example, were at their cheapest on record. A study by Capital Economics shows price increase in what it classifies as 'luxuries' - clothing, alcohol and recreation - halved to 0.6 percent from 1.2 since the start of last year. Inflation in 'essentials' — food, electricity and insurance — accelerated to 3.4 percent from 1 percent. "In other words, it now costs much more to live, but not much more to have fun," said economist Paul Dales, adding that this situation was hitting household spending on discretionary items. "It implies that consumption growth will be a little bit weaker." Clothing and homeware prices have fallen due to cut-throat competition among major retailers, which only intensified with the arrival of foreign chains to Australia. While there are few details on how Amazon will position itself, the retail giant's expected entry this year will worsen the pain of a retail industry that has been largely insulated by a housing boom and pick-up in global growth, analysts said. Jefferies expects Amazon to capture between A$3 billion to A$8 billion ($2.25-$6 billion) of sales in Australia - about 30 percent of current online retail sales. Amazon will "eat all our breakfasts, lunches and dinners", said Wesfarmers group managing director, Richard Goyder last year, although he has since softened his stance. "I'm less worried about Amazon in food," he said, after the company's quarterly sales results last month which showed its Coles supermarket chain has suffered 24 consecutive quarters of price deflation. "There are plenty of disrupters and plenty of competition around at the moment." Gerry Harvey, founder of Australia's top electronics and homewares retailer Harvey Norman , has vowed to "match or beat" Amazon's aggressive pricing. Australian retailers are being forced to change their business models but four major firms going into voluntary administration in the first two months of the year highlights the deepening crisis. Not surprisingly, the sector has been shedding jobs, with more workers lost in the year to November 2016 than any other industry. "Foreign retailers are attracted by relatively high margins in Australia and will continue to enter the market as long as that additional margin is on offer," said Masters of ANZ. So far, only 16 percent of the world's top 250 retailers have a physical presence in Australia, according to Deloitte. Average five-year operating margin for Harvey Norman was 18.7 percent, and for Wesfarmers 7.6 percent, according to Thomson Reuters data. That compares with 6.1 percent for Amazon and 5.3 percent for Best Buy .
News Article | May 4, 2017
The Reserve Bank governor, Philip Lowe, has warned the rise in household debt has made Australia’s economy less resilient to future shocks. He said some households were carrying such high levels of debt relative to income that they may respond to a future economic shock by sharply cutting spending. In a speech to the Economic Society of Australia on Thursday, Lowe said he was concerned about the link between rising household debt and house prices, though not because he thought the banking system risked becoming unstable. He said Australia’s banks were “soundly capitalised” and recent stress tests confirmed they were resilient to large movements in residential property prices. Rather, he said the RBA was concerned about the possibility of “future sharp cuts in household spending” from highly indebted households. Given the high levels of debt and housing prices, relative to incomes, it was likely some households could respond to a future shock to income or housing prices by deciding they had borrowed too much, he said. “This could prompt a sharp contraction in their spending, as they try to get their balance sheets back into better shape. “An otherwise manageable downturn could be turned into something more serious,” he warned. Lowe’s warning comes just five days before the federal budget, in which the government is expected to announce plans to charge foreigners up to $5,000 for leaving their Australian apartments empty. The government is also reportedly planning to ban foreigners from buying more than half of the apartments in new apartment builds, in a bid to help more Australians buy their first property. Lowe said the RBA was mindful of the changes that have occurred in the economy in response to rising house prices and household debt. He said in earlier periods of rising housing prices, the household sector withdrew equity from their housing to finance spending, but today, households were much less inclined to do this. “Many of us feel that we have enough debt and don’t want to increase consumption using borrowed money,” Lowe said. He said his overall assessment was that the economy had become less resilient to future shocks as house prices and debt have risen. “Given this assessment, the Reserve Bank has strongly supported the prudential measures undertaken by the Australian Prudential Regulation Authority [Apra],” he said. “Double-digit growth in debt owed by investors at a time of weak income growth cannot be strengthening the resilience of our economy. Nor can a high concentration of interest-only loans.” But Lowe said he also believed the balance between supply and demand in Sydney’s and Melbourne’s property markets would become better balanced “over time”. He said the increased rate of home building, and investment in transport, would put downward pressure on prices and rents. “[But] to the extent that, over time, a better balance is established, we will be better off not incurring too much debt, and having housing prices go too high, while this is occurring,” he warned. “In the current environment, the resilience of our economy would be enhanced by an extended period in which housing prices and debt outstanding increased no faster than our incomes.”
News Article | May 4, 2017
VANCOUVER, May 4, 2017 /PRNewswire/ - Ritchie Bros. Auctioneers Incorporated (NYSE & TSX: RBA, the "Company" or "Ritchie Bros.") reports results for the three months ended March 31, 2017. During the first quarter, the Company generated $124.5 million of revenue, a 6% decrease compared to revenues of $131.9 million in the first quarter last year, and net income attributable to stockholders for the first quarter of $10.4 million, a 65% decrease compared to $29.4 million in the same period last year. Diluted earnings per share ("EPS") attributable to stockholders were $0.10, a 63% decrease compared to $0.27 in the same quarter last year. A non-recurring charge of $2.3 million of current income tax expense was recognized during the quarter related to an increase in uncertain tax positions. Removing the impact of this income tax charge, diluted adjusted EPS attributable to stockholders3 (non-GAAP measure) during the first quarter of 2017 was $0.12, a 56% decrease compared to $0.27 in the year ago quarter. $8.6 million of before-tax acquisition-related costs are included in both GAAP and adjusted (non-GAAP) first quarter 2017 results. "Gross Auction Proceeds were challenged during the first quarter of 2017 primarily due to the oil and gas dislocation surge receding in Western Canada, and fewer large dispersals – such as the Grande Prairie auction that occurred in the first quarter last year. Our U.S. team generated solid performance, where revenue grew modestly even with a difficult comp from a very robust Q1 2016. On a positive note, we achieved a record first quarter revenue rate driven by strong pricing, good execution and good rate performance from our underwritten transactions. Our team demonstrated strong operational agility and did a disciplined job of controlling variable operational expenses. Also, EquipmentOne, Ritchie Bros. Financial Services, Mascus and Private Treaty achieved meaningful revenue growth, reinforcing that our diversification strategy is taking hold," said Ravi Saligram, CEO of Ritchie Bros. Mr. Saligram added, "Our team is also excited about the acquisition of IronPlanet and is systematically completing various work streams of integration planning to be ready for Day One of the combined business. Our discussions with U.S. regulatory authorities are well underway, and we continue to target closing the transaction by the end of the second quarter." Q1 2017 adjusted (non-GAAP) figures in the table above include the impact of $8.6 million ($0.08 per diluted share) of pre-tax acquisition-related costs. Results of operations – first quarter update For the three months ended March 31, 2017 GAP was $0.9 billion for the first quarter of 2017, a 12% decrease compared to the first quarter of 2016. This decline is due mostly to a decrease in lot count and auction calendar differences over the comparative period. Lot count (auction volumes) declined 8% in the first quarter of 2017 relative to the first quarter of 2016. EquipmentOne, the Company's online equipment marketplace, contributed $38.6 million of gross transaction value ("GTV")4 to GAP in the first quarter of 2017, a 63% increase compared to $23.7 million in the first quarter of 2016. Foreign exchange rates did not have a significant impact on GAP in the first quarter of 2017. Revenues decreased 6% during the first quarter of 2017 to $124.5 million, compared to $131.9 million in the first quarter of 2016, primarily due to lower volumes and GAP. This decrease was partially offset by a stronger Revenue Rate, which benefitted from robust underwritten contract performance compared to the relative quarter last year. Foreign exchange rates did not have a significant impact on revenues in the first quarter of 2017. The Revenue Rate for the first quarter of 2017 was 13.84%, compared to 12.94% in the first quarter of 2016. The increase in the Revenue Rate is primarily due to the performance of the Company's underwritten contracts combined with an increase in fee revenue, which is not directly linked to GAP. During the first quarter of 2017, the Company continued to actively pursue the use of underwritten commission contracts from a strategic perspective, entering into such contracts only when the risk/reward profile of the terms were agreeable. The Company's underwritten contract volume decreased to 14% of GAP during the three months ended March 31, 2017 compared to 23% in the same period in 2016. Straight commission contracts continue to account for the majority of GAP. Selling, general and administrative ("SG&A") expenses were $70.6 million during the first quarter of 2017, a 5% increase compared to the same period last year. Increased headcount, bank commitment fees related to the fourth quarter 2016 debt restructuring, and vehicle lease charges were the largest contributors to the SG&A expense growth over the comparative period. Petrowsky and Kramer (businesses acquired in 2016) accounted for another $0.4 million and $0.3 million, respectively, of new SG&A expenses. Partially offsetting these increases were $2.1 million of mark-to-market fair value changes in the Company's liability-classified share units during the first quarter of 2017 compared to the first quarter of 2016. Acquisition-related costs totaling $8.6 million were booked during the first quarter of 2017, compared to $1.2 million in the first quarter of 2016. First quarter 2017 costs primarily related to the regulatory approval process and integration planning associated with the acquisition of IronPlanet, as well as continuing employment costs incurred to retain key employees for a specified period of time following the Company's business acquisitions. First quarter 2016 costs primarily related to professional fees associated with the acquisition of Mascus, as well as continuing employment costs associated with the Mascus and Xcira acquisitions. These costs are in addition to SG&A expenses. Operating income decreased 40% during the first quarter of 2017 to $23.6 million, compared to $39.2 million in the first quarter of 2016. This decrease is primarily due to the decrease in revenues combined with the increase in acquisition-related costs and SG&A expenses. There were no adjusting items impacting operating income results in the first quarter of 2016 or 2017. Primarily for the same reasons noted above, operating income margin, calculated as operating income divided by revenues, was 19.0% for the first quarter of 2017, 1070 basis points lower than 29.7% for the same period last year. Tax expense during the quarter was impacted by a non-recurring charge of $2.3 million related to an increase in uncertain tax positions due to an unfavourable outcome of a tax dispute in one of the Company's European operating jurisdictions. Ritchie Bros. does not expect any future tax expense charges related to this ruling. As a result, the $2.3 million of increased current tax expense has been treated as an adjusting item. Net income attributable to stockholders decreased 65% to $10.4 million in the first quarter of 2017 compared to $29.4 million in the first quarter of 2016. This decrease is primarily due to the decrease in revenues combined with the increase in acquisition-related costs, SG&A expenses and interest expense, and partially offset by the decrease in income tax expense during the first quarter of 2017 compared to the first quarter of 2016. The increase in interest expense is primarily due to $6.7 million of interest on the Notes. Removing the impact of the $2.3 million charge for the change in uncertain tax positions, adjusted net income attributable to stockholders (non-GAAP measure) decreased 57%, to $12.7 million in the first quarter of 2017 from $29.4 million in the first quarter of 2016. Acquisition-related costs are included in both US GAAP net income attributable to stockholders and non-GAAP adjusted net income attributable to stockholders figures. Primarily for the same reasons noted above, diluted EPS attributable to stockholders for the first quarter of 2017 was $0.10, a 63% decrease compared to $0.27 in the first quarter of 2016. Diluted adjusted EPS attributable to stockholders (non-GAAP measure) decreased 56% to $0.12 per share in the first quarter of 2017 from $0.27 per share in the first quarter of 2016. Balance sheet analysis As at and for the 12 months ended March 31, 2017 Working capital margin, calculated as working capital divided by revenues, increased 610 basis points to 22.6% during the 12 months ended March 31, 2017 from 16.5% during the 12 months ended March 31, 2016. This increase is primarily due to a $38.5 million increase in working capital, partially offset by a $26.7 million increase in revenues period-over-period. The increase in working capital is primarily the result of no share repurchases taking place during the first quarter of 2017, whereas $36.7 million of share repurchases occurred in the first quarter of 2016. Working capital intensity5 (non-GAAP measure) increased 320 basis points, to -31.4% during the 12 months ended March 31, 2017 from -34.6% during the 12 months ended March 31, 2016. Return on average invested capital is calculated as net income attributable to stockholders divided by average invested capital. The Company measures average invested capital over a trailing 12-month period by adding the average long-term debt over that period to the average stockholders' equity over that period. Return on average invested capital decreased 1170 bps to 7.0% during the 12 months ended March 31, 2017 from 18.7% during the 12 months ended March 31, 2016. This decrease is primarily due to a $276.1 million, or a 36%, increase in average invested capital period-over-period, which was primarily the result of the issuance of the Notes in the fourth quarter of 2016. Also contributing to the decrease in return on average invested capital over the comparative period was a $69.0 million, or 49%, decrease in net income attributable to stockholders. Return on invested capital ("ROIC")6 (non-GAAP measure) decreased 640 bps to 10.3% during the 12 months ended March 31, 2017 from 16.7% during the 12 months ended March 31, 2016. ROIC excluding escrowed debt7 (non-GAAP measure) decreased 310 bps to 13.6% during the 12 months ended March 31, 2017 from 16.7% during the 12 months ended March 31, 2016. Dividend Information Quarterly dividend The Company declares a quarterly cash dividend of $0.17 per common share payable on June 13, 2017 to shareholders of record on May 23, 2017. Operational Review Online statistics During the first quarter of 2017, the Company attracted record first quarter online bidder registrations as a percentage of total bidder registrations. Approximately $428.8 million of equipment, trucks and other assets were sold to online auction bidders and EquipmentOne customers, representing a 4% decrease compared to the $448.8 million of assets sold online during the first quarter of 2016, primarily due to changes in the auction calendar and resulting lower sales volume. EquipmentOne activity During the first quarter of 2017, EquipmentOne sold more than $38.6 million of equipment and other assets on behalf of customers and saw a 37% increase in revenues compared to the first quarter of 2016. Auction activity During the first quarter of 2017, Ritchie Bros. conducted 41 unreserved industrial auctions in 13 countries throughout North America, Europe, the Middle East, Australia, New Zealand, and Asia. Auctions highlights during the quarter include: There are currently 120 unreserved auctions on the Ritchie Bros. auction calendar at www.rbauction.com, including auctions in North America, Europe, the Middle East, Australia, and Asia. Q1 2017 Earnings Conference Call Ritchie Bros. is hosting a conference call to discuss its financial results for the quarter ended March 31, 2017, at 8:00 am Pacific time / 11:00 am Eastern time / 4:00 pm GMT on May 5, 2017. A replay will be available shortly after the call. Conference call and webcast details are available at the following link: https://investor.ritchiebros.com About Ritchie Bros. Established in 1958, Ritchie Bros. (NYSE and TSX: RBA) is the world's largest industrial auctioneer, and one of the world's largest sellers of used equipment for the construction, transportation, agriculture, energy, mining, forestry and other industries. Ritchie Bros.TM asset management and disposition solutions include live unreserved public auctions with on-site and online bidding; EquipmentOneTM, an online auction marketplace; Mascus, a global online equipment listing service; private negotiated sales through Ritchie Bros. Private Treaty; and a range of ancillary services, including financing and leasing through Ritchie Bros. Financial Services. Ritchie Bros. has operations in more than 15 countries, including 45 auction sites worldwide. Learn more at rbauction.com, EquipmentOne.com, mascus.com, rbauction.com/privatetreaty and rbauction.com/financing. Forward-looking Statements This news release contains forward-looking statements and forward-looking information within the meaning of applicable U.S. and Canadian securities legislation (collectively, "forward-looking statements"), including, in particular, statements regarding future financial and operational results, including the consummation of the regulatory process and IronPlanet acquisition, continuing employment costs related to acquisitions, payment of dividends and completion of future auctions. Forward-looking statements are statements that are not historical facts and are generally, although not always, identified by words such as "expect", "plan, "anticipate", "project", "target", "potential", "schedule", "forecast", "budget", "estimate", "intend" or "believe" and similar expressions or their negative connotations, or statements that events or conditions "will", "would", "may", "could", "should" or "might" occur. All such forward-looking statements are based on the opinions and estimates of management as of the date such statements are made. Forward-looking statements necessarily involve assumptions, risks and uncertainties, certain of which are beyond the Company's control, including the numerous factors that influence the supply of and demand for used equipment; economic and other conditions in local, regional and global sectors; the Company's ability to complete the IronPlanet acquisition on the anticipated timetable or at all; the Company's ability to successfully integrate IronPlanet after acquisition, and to receive the anticipated benefits therefrom; the possibility that certain closing conditions to the IronPlanet acquisition, including regulatory approvals, may not be satisfied or may be delayed; and the risks and uncertainties set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 and the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017, which are available on the SEC, SEDAR, and the Company websites. The foregoing list is not exhaustive of the factors that may affect the Company's forward-looking statements. There can be no assurance that forward-looking statements will prove to be accurate, and actual results may differ materially from those expressed in, or implied by, these forward-looking statements. Forward-looking statements are made as of the date of this news release and the Company does not undertake any obligation to update the information contained herein unless required by applicable securities legislation. For the reasons set forth above, you should not place undue reliance on forward-looking statements. GAP and condensed consolidated income statements (Expressed in thousands of United States dollars, except share and per share amounts) (Unaudited) Non-GAAP Measures We make reference to various non-GAAP measures throughout this press release. These measures do not have a standardized meaning and are, therefore, unlikely to be comparable to similar measures presented by other companies. The presentation of this financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered in isolation of, or as a substitute for, the financial information prepared and presented in accordance with generally accepted accounting principles. The following table presents adjusted net income attributable to stockholders (non-GAAP measure) and diluted adjusted EPS attributable to stockholders (non-GAAP measure) results for the three months ended March 31, 2017 and 2016, as well as reconciles those metrics to net income attributable to stockholders, the weighted average number of dilutive shares outstanding, and diluted EPS attributable to stockholders, which are the most directly comparable GAAP measures in the consolidated income statements: The first quarter 2017 adjusting item was a $2.3 million ($2.3 million before tax, or $0.02 per diluted share) charge related to the change in uncertain tax provisions. There were no first quarter 2016 adjusting items. The following table presents working capital intensity (non-GAAP measure) results as at and for the 12 months ended March 31, 2017 and 2016, and reconciles that metric to working capital, trade and other receivables, inventory, advances against auction contracts, auction proceeds payable, trade payables, revenues, and working capital margin, which are the most directly comparable GAAP measures in, or calculated from, the consolidated financial statements: The following table presents ROIC (non-GAAP measure) and ROIC excluding escrowed debt (non-GAAP measure) results on a trailing 12-month basis, and reconciles those metrics to net income attributable to stockholders, long-term debt, stockholders' equity, and return on average invested capital, which are the most directly comparable GAAP measures in, or calculated from, the consolidated financial statements. Adjusted opening long-term debt (non-GAAP measure) is not presented due to the lack of adjusting items during the relevant periods: The adjusting items for the 12 months ended March 31, 2017 were a $2.3 million ($2.3 million before tax, or $0.02 per diluted share) charge related to the change in uncertain tax provisions recognized in the first quarter of 2017, a $5.0 million ($6.8 million before tax, or $0.05 per diluted share) charge related to the early termination of pre-existing debt recognized in the fourth quarter of 2016, and a $26.4 million ($28.2 million before tax, or $0.25 per diluted share) impairment loss on the Company's EquipmentOne reporting unit goodwill and customer relationships recognized in the third quarter of 2016. The adjusting items for the 12 months ended March 31, 2016 were a $7.3 million ($8.4 million before tax, or $0.07 per diluted share) gain on the sale of excess property in Edmonton, Canada, recognized in the fourth quarter of 2015, and $7.9 million ($7.9 million before tax, or $0.07 per diluted share) of tax savings generated by tax loss utilization recognized in the fourth quarter of 2015. The deduction from ending long-term debt at March 31, 2017 of long-term debt held in escrow consists entirely of the Notes that have a principal value of $500.0 million reduced by $4.1 million of unamortized debt issue costs.
News Article | November 10, 2016
EDINA, Minn., Nov. 10, 2016 /PRNewswire/ -- With two-thirds of consumers reaching for a mobile device to search for homes, Minnesota-based Edina Realty spent the last 18+ months creating a responsive website that delivers a consistent experience across all devices – smartphone, tablet and...
News Article | April 8, 2015
While investors are betting the Reserve Bank of Australia will deliver additional easing to lift an economy hit by the commodities slump, the central bank chief disappointed them this week by leaving the cash target unchanged at 2.25 percent. As he weighs the effect of 2.5 percentage points of reductions so far, he can’t help but notice house prices are buoyant, household debt is rising and borrowing by non-resource businesses is beginning to grow. The RBA “judged that it was appropriate to hold interest rates steady for the time being,” and will assess the case for additional cuts at future meetings, Stevens said in his statement Tuesday. With iron ore lingering below $50 a ton for the first time in at least a decade, unemployment near a 12-year high and business sentiment in the doldrums, traders are betting that another cut is almost certain by June. The following charts illustrate the balancing act RBA policy makers face and some of the indicators that may have given them reason to prolong their pause in the face of a market that had priced in a 75 percent chance of an April easing. CHART 1. Sydney housing prices are rising “strongly” even as the prices of some commodities have fallen off “sharply,” Stevens said this week. The residential property price gains in the nation’s most populous city have spurred concern that RBA stimulus may be overheating the market, while the price of iron ore has collapsed 60 percent over the past year, creating a drag on Australia’s economy. CHART 2. The RBA’s rate cuts have driven corporate bond yields to record lows and, as the central bank noted Tuesday, lending to businesses has been strengthening. CHART 3. While there has been a sharp drop-off in capital expenditure by the mining industry, other parts of the economy are increasing their spending. CHART 4. Despite this, the “animal spirits” that Glenn Stevens has sought to summon are far from abundant in the world’s 12th largest economy. With confidence languishing and unemployment high, investors are betting rate cuts are a matter of time.
News Article | April 13, 2015
The prospect that an ever-bigger plunge in iron-ore prices will wreck Australia’s budget is adding to pressure for the central bank to cut interest rates further. The country’s biggest export has plummeted 58 percent to $49 a ton over the past year, taking an ax to federal revenue. Treasurer Joe Hockey said in an interview with the Australian Financial Review that $35 is a level he’s contemplating for the budget he hands down next month. Citigroup Inc. sees prices averaging in the $30s in the second half of 2015. Such levels could mean a blowout in deficits Hockey had hoped to rein in. While the treasurer was quoted as saying he doesn’t want the budget to “arm wrestle” with monetary policy, his ability to help the economy with fiscal stimulus would be curtailed. More of the heavy lifting would fall to the Reserve Bank of Australia, which has already cut its cash rate to an unprecedented 2.25 percent and said more easing may be appropriate even as house prices soar. “The whole country seems to be suffering” as iron ore slumps, said Annette Beacher, a Singapore-based economist at TD Securities. “The closer we get to the budget and the more we realize the budget is in trouble, pricing a 1.5 percent cash rate is certainly not out of the question.” While Beacher thinks the RBA is reluctant to go below 2 percent unless all other avenues have been exhausted, the swaps market is already pricing in at least half a percentage point more in easing by October, and a 75 percent chance the reduction to 2 percent will come next month, according to data compiled by Bloomberg. The following charts illustrate how the country’s fiscal and monetary policies have historically worked in tandem, the impact of plunging iron-ore prices on national income and the fallout from a slowdown in China, the country’s biggest trading partner. CHART 1. Australia’s budget deficit as a percentage of gross domestic product has tended to move in the same direction as the RBA cash target. Bigger deficits on the cards may also signal further easing from the central bank. CHART 2. The extra iron ore Australia is now exporting to China has helped drive the decline in prices. The additional tons shipped aren’t generating enough money to make up for the price reduction, and that income deterioration may worsen. CHART 3. Chinese growth, which is forecast to slow to a year-on-year pace of 7 percent in figures due this week, is creating headwinds for commodity prices. For Australia, a depreciation of the currency might provide some relief, although the RBA has said the local dollar remains too high to help the economy.
News Article | January 4, 2015
Australian lending to business growing at the fastest pace in almost six years may herald the stirring of “animal spirits” that central bank Governor Glenn Stevens has been seeking. Loans to companies increased 4.6 percent in November from a year earlier, the Reserve Bank of Australia announced on New Year’s Eve. That was the most since March 2009, when the rate was boosted by comparison with a darkening world economy as the global financial crisis loomed. Business lending growth “will be an important marker of prospects for a non-mining capital expenditure and hiring recovery in 2015,” said Ben Jarman, an economist at JPMorgan Chase & Co. in Sydney. “RBA officials have bemoaned a lack of ‘animal spirits,’ which is restraining appetite for corporate expansion and real investment.” The revival in credit growth, and a weakening currency that improves the competitiveness of manufacturers, may allow the central bank to stand pat for longer after cutting its benchmark interest rate to a record-low 2.5 percent. The pickup in business lending also opens a new growth channel for Commonwealth Bank of Australia and National Australia Bank Ltd., which have been relying on a housing boom for profits. Mortgage growth has provided succor to Australian lenders in the past two years, growing at more than double the pace of business credit, RBA data show. Outstanding home loans averaged a 5.4 percent increase in the two years to Nov. 30, compared with a 2.4 gain in corporate credit, the data show. “Business confidence seems to be coming back, which is a good sign for the banks this year,” said T.S. Lim, a banking analyst at Bell Potter Securities Ltd. in Sydney. “They have been far too reliant on home-loan growth in recent years. Business loans bring with them higher margins and clearly diversifies earnings.” The Australian dollar’s weakness is assisting some companies. The Aussie slumped 8.3 percent last year, after sliding 14 percent in 2013 as the economy adjusted to waning mining investment that has driven almost 24 years of uninterrupted growth. The currency was at 80.85 U.S. cents as of 11:30 a.m. in Sydney, after earlier reaching a 5 1/2 year low of 80.53. Stimulus to consumers has arrived at gas stations after the oil price tumbled 46 percent in 2014. “Aussie consumers and businesses are borrowing -- but in a measured way,” said Craig James, a senior economist at the securities unit of Commonwealth Bank. “Still, that means the Reserve Bank has no reason to be either lifting or cutting interest rates at present. The weaker Aussie dollar and lower petrol prices are providing solid stimulus to the economy.” Seven economists, including Westpac’s Bill Evans, who correctly predicted the previous easing cycle, are calling for further rate cuts this year as unemployment increases. Another nine analysts see the RBA raising borrowing costs, while 11 expect them to be unchanged. The benchmark 10-year government bond yield fell 1.5 percentage points last year to 2.74 percent. It was at 2.75 percent today, compared with the record-low of 2.698 percent reached in June 2012. Traders are pricing in 41 basis points of rate cuts this year, according to swaps data compiled by Credit Suisse Group AG. The central bank’s board said in minutes of its December policy meeting that members noted the market’s outlook “and discussed the factors that might be producing such an expectation.” It reiterated the outlook for a period of rate stability. Economic growth slowed to 0.3 percent in the third quarter, the weakest in 18 months, the government said Dec. 3. Expansion was supported by property price gains in Sydney and Melbourne that spurred a building boom. The heat is coming out of the market as data Jan. 2 showed the annual increase in nationwide home prices was the lowest in 14 months. “The growth rate of home prices is easing to more sustainable levels -- not a boom and not a bust,” Commonwealth Bank’s James said. “The doom sayers will need to find something else to worry about.”
News Article | January 26, 2015
Asia’s wealthy are falling out of love with the Aussie dollar as record-low yields and sustained declines persuade them to look elsewhere, according to UBS Group AG. Many of the bank’s wealthiest clients in the region began to abandon the currency as Australia’s bond yield premium over the U.S. slid and the Federal Reserve discussed raising interest rates, said Simon Smiles, Zurich-based chief investment officer for ultra-high-net-worth individuals. The 10-year yield is 74 basis points above that of the U.S., down from 130 a year ago. “Two years ago when I came to the region, in most client meetings, people were asking about Aussie assets, the Australian dollar, yield play; when you talk about it now, there’s almost no interest,” Smiles said in an interview on Monday. “From the third quarter of last year, there’s a growing belief that the U.S. dollar would start a sustained appreciation trend.” The Aussie has tumbled 16 percent in the past six months to the weakest level since 2009 and Reserve Bank of Australia Governor Glenn Stevens has said he expects it to extend declines. The local dollar has fallen less than the euro and the currencies of Denmark, Canada and Norway this year and “should be the next domino to fall,” said Olivier Korber, a strategist at Societe Generale SA in Paris. Australia has been struggling with the end of a once-in-a-century resources boom and a slowdown in China, which buys more than 35 percent of the South Pacific nation’s exports. A Deutsche Bank AG index tracking the prices of commodities important to Australia has tumbled 30 percent in the past 12 months with iron ore and thermal coal sliding to multi-year lows. China’s economy grew 7.4 percent in 2014, the slowest pace in 24 years. The expansion will weaken to 7 percent this year, according to the median estimate in a Bloomberg News survey. “The biggest structural concern for Australia and the currency is probably the landing of the Chinese economy amid falling commodity prices,” Societe Generale’s Korber said in an e-mail interview on Jan. 23. Australia’s dollar is set to end the year at 77 U.S. cents, he said. An earlier-than-expected decline below this level may accelerate its descent toward 70 cents, he said. The Aussie was little changed at 79.24 cents at 12:42 p.m. in Sydney after declining on Monday to 78.55 cents, the weakest since July 2009. Forecasters see it ending the year at 78 cents, according to the median estimate in a Bloomberg survey. The Bank of Canada’s unexpected decision to cut interest rates last week and the European Central Bank’s announcement of a bond-purchase program have spurred traders to increase bets the RBA will also loosen monetary policy. There’s a 40 percent chance it will lower borrowing costs on Feb. 3, up from about 25 percent odds on Jan. 16, interest-rate swaps show. Central bank chief Stevens last month signaled the cash rate will remain unchanged for the foreseeable future. The currency will probably extend losses this year, he said in an interview with the Australian Financial Review published Dec. 12, saying a level of 75 cents would be better than 85. “The weaker Australian dollar is easing monetary conditions for the RBA,” David Forrester, senior vice president for Group of 10 foreign-exchange strategy at Macquarie Group Ltd. in Singapore, said on Monday. “The RBA would prefer to ease monetary conditions via the currency rather than having to cut rates and risk generating asset bubbles.” Yields on Australian five-year inflation swaps, which signal expectations for consumer prices, dropped to a five-year low of 2.12 percent on Monday, toward the lower range of the central bank’s inflation target of 2 percent to 3 percent. A further decline in the Aussie will depend on what the Fed says about the U.S. dollar at its two-day meeting starting today, Forrester said. While Macquarie expects Australia’s currency to weaken to 78 cents in three months, there’s a risk the Fed “could talk down” the U.S. dollar, providing a respite for its Australian counterpart, he said on Jan. 26. Bloomberg’s dollar gauge is set for its seventh monthly gain as the Fed moves toward raising interest rates. Some 45 percent of 53 economists in a Bloomberg survey said the central bank will raise the benchmark lending rate in June. Six percent said July, while 30 percent said the Fed will wait until September for the first increase since 2006. Fed officials last month said they expect to raise the rate this year. “The Australian dollar has fallen on a total return basis, lost people money and there’s an expectation that it will continue to depreciate,” UBS’s Smiles said. “Clients see it as a fairly compelling reason not to be invested there.”
News Article | January 28, 2015
Australia’s core consumer prices accelerated last quarter, easing pressure on the central bank to reduce interest rates and sending the local currency higher. The trimmed mean gauge of core prices rose 0.7 percent from the previous quarter, when it climbed a revised 0.3 percent, the Bureau of Statistics said in Sydney today. That was more than the median forecast of 23 economists for a 0.5 percent gain. Australia’s price growth is a developed-world rarity as deflation threatens some advanced nations. While policy makers from Tokyo to Frankfurt are undertaking quantitative easing to reflate their economies, the Reserve Bank of Australia is trying to steer a transition to extend more than 23 years of growth. Traders pared bets that central bank Governor Glenn Stevens will reduce the record-low 2.5 percent benchmark next week following the data. “Australia is far different from some other parts of the globe,” said Savanth Sebastian, an economist at a unit of Commonwealth Bank of Australia. “The euro zone continues to worry about the deflationary threat from sluggish growth and sliding oil prices, while inflation remains below the Fed’s target rate in the U.S. But here in Australia inflation is holding at the low end of the Reserve Bank’s target.” The currency, which declined 6.5 percent last quarter, strengthened after the report to 79.77 U.S. cents at 12:50 p.m. in Sydney compared with 79.16 immediately before the data. Traders’ bets on a February rate cut shrank to 15 percent from 44 percent yesterday, swaps data compiled by Bloomberg showed. Non-tradables, or domestic inflation for goods and services that aren’t imported such as fast food and utilities, climbed 2.3 percent from a year earlier, the report showed. Tradables, such as imported electrical goods and clothing, rose 0.7 percent. The consumer price index advanced 0.2 percent from the previous three months, compared with economists’ forecast for a 0.3 percent increase. Headline prices for domestic holiday travel and accommodation climbed 5.8 percent in the fourth quarter and the cost of new dwelling purchases by owner occupiers advanced 1.1 percent. Automotive fuel prices declined 6.8 percent following an almost 40 percent drop in the oil price last quarter, and audio-visual and computing equipment costs fell 5.2 percent from the prior quarter, it showed. The weighted-median gauge of inflation, a second core measure that excludes the largest price increases and declines, advanced 0.7 percent in the fourth quarter, compared with economists’ estimates for a 0.5 percent gain. The trimmed mean gauge advanced 2.2 percent from a year earlier, matching economists’ forecasts. The weighted median increased 2.3 percent in the 12-month period versus an estimated 2.2 percent rise, today’s report showed. “This tells you that demand in the economy is holding up reasonably well compared to supply and I think that’s the way the RBA’s going to see this story as well,” Paul Bloxham, chief Australia economist at HSBC Holdings Plc, said by phone in Sydney. “We continue to expect that the RBA will remain on hold this year, we don’t think they’ll deliver cuts.” The central bank aims for inflation of between 2 percent and 3 percent on average. The CPI increased 1.7 percent in the fourth quarter from a year earlier, compared with economists’ forecast for a 1.8 percent increase. The statistics bureau also released a seasonally adjusted consumer price index that showed a 0.3 percent increase last quarter, for an annual gain of 1.6 percent. The RBA is trying to rebalance the economy away from mining in the north and west as investment wanes, and stimulate manufacturing, residential construction and consumption. It may be reluctant to lower borrowing costs further amid surging property values. Sydney home prices climbed 12.4 percent in December from a year earlier, a Corelogic-RP Data home value index showed. Australian employers boosted payrolls in November and December by the most in any two-month period in the past eight years, government data released this month showed. Unemployment dropped to 6.1 percent in December from 6.2 percent the previous month, the statistics bureau said in Sydney Jan. 15, lower than a median estimate of 6.3 percent.
News Article | January 29, 2015
Pressure is mounting on Australia’s central bank to join developed-market peers in easing monetary policy as falling oil prices and stagnant economies spread disinflation. The Reserve Bank of New Zealand abandoned a tightening bias today and warned of negative annual headline inflation, a day after Singapore’s unscheduled easing. Those moves followed Canada and India unexpectedly cutting borrowing costs and Europe announcing quantitative easing. “The key driver for these central banks is increasing downside risks to global inflation and growth,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. “Canada talked about an insurance cut and pointed at energy, you substitute that in Australia for iron ore and dairy in New Zealand. It’s no coincidence that the commodity nations’ central banks are shifting rapidly in policy assessments.” Traders are pricing in a 53 percent chance the RBA board will ease by a quarter percentage point at its first meeting of the year Feb. 3, according to swaps data compiled by Bloomberg. The chance fell to 15 percent Jan. 28 after a report showed faster-than-forecast core inflation in the fourth quarter. The RBA has stood pat at a record-low 2.5 percent since August 2013. A columnist in Australia’s biggest selling daily newspaper wrote overnight that the Reserve Bank of Australia will cut both its growth and inflation forecasts in its Statement on Monetary Policy to be released Feb. 6, without citing anyone. Terry McCrann predicted that Governor Glenn Stevens will lower rates by a percentage point this year to 1.5 percent. The Bloomberg Commodity Index slid to a 12-year low this week, with crude, hogs and copper leading losses in 2015. Inventories are rising after a decade-long bull market spurred farmers, miners and drillers to increase production. A strengthening dollar and falling energy prices are threatening to prolong the rout as they make it cheaper to produce more. The price of iron ore, Australia’s biggest export, has dropped to the lowest level in more than five years as the biggest producers, led by Rio Tinto Group and Vale SA, raised low-cost output in Australia and Brazil while growth in China’s economy slowed. RBC’s Ong altered her rate expectations after the inflation data and is predicting the RBA will reduce rates in March and May. She forecasts New Zealand’s central bank will ease policy in June and July. UBS Group AG’s economists in Australia, Scott Haslem and George Tharenou, also changed their cash rate forecasts Jan. 28 to 50 basis points of reduction in the first half of 2015. “We now expect the RBA will eventually judge the path of least regret is to trim the cash rate further to ’insure’ the economic recovery, and protect the Australian dollar’s recent fall,” they said in a research note. Three of Australia’s four major banks, the country’s largest investment bank and Deutsche Bank AG. also expect cuts in the first half.