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New vehicle sales bottom?

Services sector activity hits 4½-year low
Weekly petrol prices; New vehicle sales; Services sector indexes; Inflation gauge

Petrol: According to the Australian Institute of Petroleum, the national average price of unleaded petrol fell by 0.8 cents in the past week to 141.0 cents a litre. But Brisbane and Sydney pump prices are poised to lift.

New vehicle sales: In July, 83,184 new vehicles were sold, down by 2.8 per cent over the year. In the twelve months to July, sales totalled 1,099,688 units to be down 7.4 per cent on a year ago – above the 9½-year low of 7.8 per cent in June.

Services sector: The ‘final’ CBA/IHS Markit Services Purchasing Managers’ Index (PMI) fell by 0.3 points to 52.3 points in July. The Australian Industry Group (AiGroup) Performance of Services Index (PSI) fell by 8.3 points to 43.9 points in July – the lowest level since November 2014. Readings below 50 indicate a contraction of services sector activity.

Inflation: The Melbourne Institute monthly headline inflation gauge rose by 0.3 per cent in July. The gauge’s annual growth rate lifted from 1.6 per cent in June to 1.8 per cent in July.

Movements in the petrol price can affect consumer spending, and in turn, prospects for retailers. The vehicle sales data provides guidance on consumer spending as well as conditions for the Autos and Components sector of the sharemarket. The inflation Gauge estimates month-to-month price movements for a wide-ranging basket of goods and services. The services sector gauge highlights conditions in the sector as well as providing guidance on the economy more generally.

What does it all mean?

• It’s a good time for motorists to fill up in Brisbane and Sydney. Unleaded petrol prices are around the lowest point of the current retail discounting cycle. But pump prices are set to lift in the next few days with prices bottoming just below $1.30 a litre.

• Reserve Bank policymakers have a lot to ponder as they sit down to determine the next move for interest rates. While Commonwealth Bank economists expect the Board to ‘sit pat’ tomorrow after successive rate cuts in June and July, the mixed run of domestic economic data continues, despite significant policy stimulus.

• Reduced interest rates and an easing in home lending standards have stabilised the property market. And tax refunds have boosted consumer confidence. Australia’s trade sector is in good shape thanks to renewed China stimulus and lifting commodity prices. But today’s release from AiGroup was a shocker.

• According to AiGroup, activity in the services sector – which makes up a huge part of the Aussie economy – contracted by the most in 12 months in July. Activity has contracted for four out of the past seven months with the gauge now at 4½-year lows. Sales, new orders and employment all fell.

• The retail and construction sectors – amongst the largest employers in Australia – are both mired in a protracted downturn. AiGroup’s employment index contracted for a second consecutive month in July, hitting 2½-year lows.

• On a more positive note, new vehicle sales may be bottoming. In fact, the rate of deceleration in rolling annual motor vehicle sales slowed from 9½-year lows of 7.8 per cent in June to 7.4 per cent in July. In particular, annual declines were less acute in New South Wales and Victoria, potentially on the back of a stabilisation in property prices in Sydney and Melbourne and increased promotional activity by car dealerships.
What do the figures show?

Petrol prices

• According to the Australian Institute of Petroleum, the national average price of unleaded petrol fell by 0.8 cents in the past week to 141.0 cents a litre. The metropolitan price fell by 0.6 cents to 140.7 cents a litre and the regional price declined by 1.3 cents to 141.6 cents a litre.

• Average unleaded petrol prices across states and territories over the past week were: Sydney (down by 6.6 cents to 130.1 c/l), Melbourne (up by 12.3 cents to 153.1 c/l), Brisbane (down by 10.1 cents to 131.5 c/l), Adelaide (down by 1.1 cents to 152.0 c/l), Perth (down by 1.4 cents to 140.1 c/l), Darwin (down by 0.2 cents to 139.8 c/l), Canberra (down by 0.5 cents to 142.3 c/l) and Hobart (down by 0.2 cents to 151.7 c/l).

• The smoothed gross retail margin for unleaded petrol fell from 14.12 cents a litre to 13.72 cents a litre last week (24-month average: 12 cents a litre).

• The national average diesel petrol price fell by 0.1 cent a litre to 147.7 cents a litre over the week. The metropolitan price fell by 0.2 cents to 146.3 cents a litre and the regional price fell by 0.1 cent a litre to 148.8 cents a litre.

• MotorMouth records the following average retail prices for capital cities today: Sydney 128.7c; Melbourne 146.3c; Brisbane 129.3c; Adelaide 139.0c; Perth 130.8c; Canberra 141.6c; Darwin 139.8c; Hobart 151.7c.

• Today, the national average wholesale (terminal gate) unleaded petrol price stands at 129.6 cents a litre, up by 0.8 cents over the week. The terminal gate diesel price stands at 136.4 cents a litre, up by 1.5 cents over the past week.

• Last week, the key Singapore gasoline price fell by US$2.70 or 3.8 per cent to US$69.10 a barrel. In Australian dollar terms, the Singapore gasoline price fell by $1.96 or 1.9 per cent last week to $101.44 a barrel or 63.80 cents a litre.

New vehicle sales

• The Federal Chamber of Automotive Industries reported: “The July 2019 market of 83,184 new vehicle sales is a decrease of 2,367 vehicle sales or -2.8 per cent on July 2018 (85,551) vehicle sales. July 2019 (27) had one more selling day than July 2018 (26) but this resulted in a decrease of 209.5 vehicle sales per day.”

• “The Passenger Vehicle Market is down by 3,161 vehicle sales (down 11.1 per cent) over the same month last year; the Sports Utility Market is down by 1,269 vehicle sales (down 3.5 per cent); the Light Commercial Market is down by 325 vehicle sales (down 1.9 per cent); and the Heavy Commercial Vehicle Market is down by 150 vehicle sales (down 4.5 per cent) versus July 2018.”

Services Purchasing managers’ indexes

• The ‘final’ Commonwealth Bank/IHS Markit Services Purchasing Managers’ Index (PMI) fell by 0.3 points to 52.3 points in July. Any reading above 50 indicates expansion.

• CBA notes: “PMI survey data showed business activity in the Australian service sector rising at the start of the third quarter, supported by order book growth. Backlogs of work accumulated further while business sentiment remained positive. However, employment fell for the first time in three months. Meanwhile, cost inflation intensified, lifted by higher supplier fees and greater energy prices, pushing firms to raise fees further.”

• The Australian Industry Group (AiGroup) Performance of Services Index (PSI) fell by 8.3 points – the biggest fall in 12 months – to 43.9 points in July. Readings below 50 indicate a contraction of services sector activity.

• Key services sector sub-indexes weakened in July. Employment (down 3.8 points to 43.8 points), new orders (down 12.7 points to 44.1 points) and sales (down 8.0 points to 45.1 points) all declined.

• AiGroup notes: “Factors reported to be inhibiting activity for many businesses in July included soft sales to retail customers, slower sales into the construction sector, increased price competition within sectors, drought conditions affecting large parts of Australia and generally low business and consumer confidence.”

Inflation

• The Melbourne Institute monthly headline inflation gauge rose by 0.3 per cent in July. The gauge’s annual growth rate lifted from 1.6 per cent in June to 1.8 per cent in July. The smoothed 12-month annual average of the gauge is at 1.81 per cent – the slowest growth rate in over two years.

• The trimmed mean gauge also lifted by 0.3 per cent in July. And the gauge’s annual growth rate increased from 1.8 per cent in May to 1.9 per cent in July – below the Reserve Bank’s 2-3 per cent underlying inflation target.
What is the importance of the economic data?

• Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum (AIP). National average retail prices are calculated as the weighted average of each State/Territory metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions. AIP data for retail petrol prices is based on available market data supplied by MotorMouth.

• The Federal Chamber of Automotive Industries releases estimates of new vehicle sales on the third business day of the month. The figures highlight the strength of consumer spending as well as conditions facing auto & components companies.

• Melbourne Institute have developed a monthly inflation indicator to give markets and policy makers a monthly update on inflation trends. Based on the ABS methodology for calculating the quarterly consumer price index, the Melbourne Institute Monthly Inflation Gauge estimates month-to-month price movements for a wide-ranging basket of goods and services across the main capital cities of Australia. This report is produced monthly and is released with a lag of one month.

• CBA and the Australian Industry Group release surveys on the services sector each month. The surveys are the local equivalents of similar surveys released for other countries. The services sector surveys are useful, not just in showing how the sector is performing, but in providing some sense about where it is headed. The key ‘forward looking’ components are orders and employment.
What are the implications for interest rates and investors?

• The Reserve Bank is expected to sit back for a few months before deciding the next move on interest rates. Developments in the Aussie labour and property markets are considered key to outlook for rates. Tax cuts may boost consumer spending.

• That said, weakness in the Aussie services sector, fading strength in iron ore prices, the re-intensification of global trade tensions, ongoing drought and the impact of policy easing by global central banks will also be ‘front of mind’ for policymakers in their deliberations.

Published by Ryan Felsman, Senior Economist, CommSec