The key macro announcement in Australia in the past week was the stronger than expected employment print for the month of October. Total employment lifted by almost 60k and the unemployment rate dropped to 5.9% from 6.2%. Expectations of a December rate cut have consequently diminished. Evidente has been of the view for a while that given the spare capacity in the economy and labour market, the RBA should deliver more monetary stimulus. One strong monthly employment outcome is not sufficient to alter my view that labour market conditions are slack and that another rate cut is necessary, for three reasons.
- The labour force survey is widely understood to be plagued by sampling problems which have meant that the monthly estimates have become more volatile and a less reliable barometer of the cyclical weakness or strength of the labour market.
- As long as these sampling issues remain, the Wage Price Index becomes an increasingly important indicator to assess the state of the labour market. On this front, there is little to concern the inflation hawks; private sector wages in the past year have grown at their lowest rate since the inception of the series in the late 1990s.
- Employment growth and core inflation have moved in opposite directions this year. The lift in employment growth in the past three quarters – the strongest gains since the back end of the credit boom (see chart) – has been associated with a drop in core inflation. Evidente has written on the phenomenon of a flatter Phillips Curve more extensively for the United States; in recent years, disinflation has intensified at a time when the unemployment rate has dropped 300 basis points to 5%. Why various measures of economic slack are becoming increasingly unreliable gauges for inflation in countries like Australia and the United States remains puzzling.
China's Rising Middle Class and the Upheaval in Australia's Exports
A number of developments in the past week confirmed that Australia's exports to China are undergoing a revolution thanks to inexorable rise of China's middle class. At a time when BHP dropped briefly to below $20 – its lowest level since 2005 due to the Samarco dam disaster and renewed weakness in crude oil prices – the news-flow in Australia focussed on the growing shortage on supermarket shelves of Bellamy’s baby formula, while overseas arrivals from China continue to surge.
Chinese demand for Australia's agri-food products, vitamins, wine, tourism, higher education and other non-commodity goods and services will continue to grow strongly and help diversify our export basket. In an environment where the aggregate supply of growth in Australia is anaemic, the rise of China's middle class is a powerful and seductive investment theme that offers strong growth prospects to Australia's non-commodity exporters.
Australia's White Gold Rush
Tasmanian based company, Bellamy’s (BAL AU Equity) – which produces organic certified baby formula - has captured the imagination of investors and the media due to the lift in the share price this year from less than $2 to close to $10. In recent weeks, the shortage of baby formula in supermarkets has become a barbeque stopper in Australia, made more severe by Singles Day in China on November 11th. Evidente can vouch for the shortage on supermarket shelves; recent visits to the local Coles and Woolworths supermarkets revealed that neither had Bellamy’s baby formula in stock (see photos).
The issue has even become politicised, with politicians at the federal level voicing concerns that mothers in Australia are missing out. However this dynamic plays out, the one sure thing is that the stellar returns from companies like Bellamy’s and New Zealand’s dairy company, A2 will attract an influx of new capital and entrants into this space.
Chinese overseas arrivals continue to surge
ata released by the ABS during the week showed that short term overseas arrivals grew by 2.5% in the September quarter to 1.87 million, outstripping growth in short term overseas departures of 1% (see chart).
This continues a trend evident over the past four years, in which growth in arrivals has exceeded growth in departures, in large part thanks to the renewed weakness in the Australian dollar. Stocks such as Sydney Airport (SYD AU Equity) and hotel operator, Mantra Group (MTR AU Equity) have been beneficiaries from the lift in growth of tourists visiting Australia, while stocks such as Flight Centrehave been affected adversely by the slowdown in growth of Australians holidaying overseas.
Amongst overseas arrivals, the number of Chinese tourists visiting Australia has grown rapidly and now account for over 16% of all overseas arrivals (see chart). The growth in Chinese overseas arrivals should also benefit from a recent announcement from the Australian government of the introduction from 2016 of a new 10 year multiple entry visa available to Chinese citizens travelling to Australia. Australia is the fourth country to offer Chinese nationals decade long visas, following Singapore, the US and Canada.