[CommSec Research]Grocery prices in focus; Home sales lift

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Grocery prices in focus; Home sales lift

Retail price data; New Vehicle Sales; New Home Sales; PSI

• The Bureau of Statistics has released March quarter price data for a range of consumer products, notably grocery items. While bananas rose in price by almost 90 per cent, milk fell by almost 15 per cent. Overall, 19 of the 51 items were cheaper in the quarter.
• In April, 74,214 vehicles were sold, down by 8.8 per cent compared with a year ago. In seasonally adjusted terms CommSec estimates that sales fell by 1.0 per cent in the month.
• New home sales rose by 4.3 per cent in March after rising by 0.6 per cent in February. Private sector house sales rose by 5.8 per cent in March while multi-unit sales dropped by 10 per cent. New home sales are still down 5.1 per cent on a year ago.
• The Performance of Services index rose by 5 points to 51.5 in April – marking the first expansion in the sector in six months. Key sub indices, sales and new orders contracted at a slower pace, while employment recorded its best reading in over six years.

What does it all mean?

• All the data today points to an economy that seems to be attempting to recover from the rapid rate hikes of last year. The 4.3 per cent rise in new homes sales is a welcome sight given that activity levels have been subdued over the past year.
• Despite the pickup in home sales, the housing sector is in for a extended period of consolidation. Housing finance - a good indicator of future home sales - has come of the boil and property prices recorded its biggest quarterly fall in years over the March quarter. In addition new home sales are still down over 5 per cent on a year ago.
• Fundamentally, there are good reasons for home building to increase. The rental market is still tight and population growth is healthy. And with the labour market remaining strong, investor housing demand is likely to pickup pace in the second half of 2011.
• The services sector is growing for the first time in six months. However you cannot really read too much into what on face value looks like an encouraging result. Especially given that the service sector has been doing it tough over the past year and the latest improvement comes after a bout of serious weakness. In addition key sub indices like sales and forward orders are still contracting, albeit at a slower pace.
• Official interest rates have been on hold for six months and no doubt the lack of rate hikes is allowing businesses and consumers to get back to basics. However there are a couple of factors that will ensure activity remains relatively subdued in the near term, including a stronger currency, conservative buying behaviour of consumers and businesses and the added pressures on the household budget.
• Businesses are under substantial pressure at present with costs edging higher and consumers driving hard bargains. Input costs and wages remain elevated but selling prices are only modestly rising. In fact the wages sub index of the service survey recorded its highest reading in almost three years. A further period of interest rate stability would clearly help the situation.
• The general perception is that food prices only go one way – and that’s up. But surprisingly almost 40 per cent of commonly purchased weekly retail items like grocery items, alcohol and petrol actually fell in price during the March quarter. And if it wasn’t for the floods and cyclone, the proportion of items falling in price would have been even higher. It certainly pays to look more closely at prices of the goods we buy, rather than to just take the advice of so-called “experts” that inflation is on the rise.
• The slide in car sales in April cannot be looked at on its own given the timing of Easter. This year Easter occurred super late compared with last year coupled with a five day long weekend. Unfortunately seasonal adjustment programs find it difficult to account for the “Easter effect”, so it may result in super-strong results in March followed by a weaker result in April. Clearly it will be a case of adding the two months together to find out what is happening. Overall CommSec estimates car sales fell by 1 per cent in seasonally adjusted terms in April.

What do the figures show?

Quarterly retail prices:

• The Bureau of Statistics has released average prices for 51 key consumer products for the March quarter, ranging from bananas to beer and even petrol. Using averages for the eight capital cities, CommSec has calculated that 32 of the 51 items rose in price during the quarter while the remaining 19 items actually became cheaper. The biggest price increase was by bananas (up 89.8 per cent), followed by oranges (up 19.3 per cent) and onions (up 12.5 per cent). At the other end of the scale, the price of milk fell by 14.5 per cent in the quarter, followed by baked beans (down 7.4 per cent) and tinned peaches (down 4.2 per cent).
• Other notable price changes: petrol (up 8.3 per cent), packaged beer (down 0.9 per cent), bread (down 1.1 per cent), T-bone steak (down 2.4 per cent), free range eggs (down 3.3 per cent).

Car sales

• The Federal Chamber of Automotive Industries reported that 74,214 new cars were sold in April, down 8.8 per cent on a year ago. Passenger car sales were 11.9 per cent lower than a year ago, 4WDs were down 5.6 per cent and “other vehicles” (trucks, utes etc) were down 3.6 per cent.

New home sales

• The Housing Industry Association reported that new home sales rose by 4.3 per cent in March after a 0.6 per cent rise in February. Private sector detached house sales rose by 5.8 per cent in March while multi-unit sales dropped by 10 per cent.
• Across the states detached new house sales increased by: 13.5 per cent in New South Wales, 11.1 per cent in Queensland, 3.6 per cent in Victoria, and 3.1 per cent in Western Australia. Sales fell by 6.4 per cent in South Australia
• The Housing Industry Association noted that “The volume of new home sales remains subdued, within which the stronger result for March is certainly a welcome outcome.”

Performance of Services

• The Performance of Services index rose by 5 points in April to 51.5, marking the first expansion in the sector in six months. The key 50.0 level separates expansion from contraction. Sales and new orders contracted at a slower pace, while employment recorded its best reading in over six years.
• Selling prices rose modestly while wages accelerated sharply with the sub index recording its highest reading in wages and selling prices were higher.

What is the importance of the economic data?

• The Federal Chamber of Automotive Industries release figures on new car sales at the start of each month. The data is useful in gauging consumer spending behaviour.
• The Housing Industry Association releases data on the sales of new homes each month. The HIA collects the data each month from a sample of Australia's largest 100 home builders.
• The Performance of Services index is released by Australian Industry Group and the Commonwealth Bank each month. The PSI is designed to provide a guide to conditions in retail, financial and other service sectors.

What are the implications for interest rates and investors?

• Interest rates are already restrictive and the Reserve Bank would be best staying on the interest rate sidelines in the near term – especially given that inflation is well contained at present. Food inflation is an issue in other parts of the world however it is still well contained domestically. The floods in Queensland together with Cyclone Yasi have led to price rises for a select number of fruit and vegetable products, but prices have already started to fall.
• The cumulative rate hikes, hangover effect from the expiry of the first home buyer grant and appreciation in property prices has given potential home buyers a valid reason to be more circumspect about future purchases. However the rebuilding phase in flood ravaged towns is likely to support construction activity in the midterm.