US stocks pushed higher (again) overnight. The Dow Jones Industrials closed at (another) record high. The S&P500 and the NASDAQ are not far from record highs either.
Earnings season has been good for US stocks so far. And after the market closed, Apple reported better than expected quarterly sales and earnings, pushing its share price up in the after-hours market by 6%. A 15% increase in sales of iPads helped to boost the result.
Funnily enough, earlier in the day data showed US consumer spending was flat for the month of June, compared to expectations of 0.3% growth. If consumers aren’t spending in the aggregate, but are consuming technology products at a decent clip, spending must be falling elsewhere.
The victim, most likely, is the traditional retailer. ‘The mall’ is fast becoming an anachronism (or at least many are). You only have to look at Myer’s share price, currently near an all-time low, to see that. The retail-focused property trusts aren’t in good shape, either.
As well as spending declines thanks to general overcapacity and disinterest, you have the Amazon effect. In some just released, ground-breaking research, investment bank UBS says the arrival of Amazon will have an impact on the entire economy.
Who would’ve thought?
As the Financial Review reports:
‘Amazon will squeeze retailer margins and prices harder than sales and could crimp inflation by one quarter of a point, limiting the Reserve Bank’s ability to raise interest rates.
‘According to a landmark report by UBS, Amazon is likely to snare only 2 per cent of retail sales within five years of entering Australia, growing revenues from more than $400 million to about $3.5 billion by 2023 and crimping retailers’ sales by around 2 per cent.
‘But the US giant will have a material impact on retailer profits by prompting more consumers to shop online, where retailers’ margins are thinner, by driving retail prices down significantly and by forcing retailers to invest hundreds of millions of dollars into e-commerce infrastructure which may take years to deliver returns.’
If the irony of this analysis is lost on you, let me point it out.
The reason why traditional retailers are struggling is because they’re getting squeezed at both ends. Rising occupancy and labour costs, and pressure on selling prices thanks to overcapacity and online competition.
Occupancy costs are increasing because Australia is in the midst of an epic land price boom. And because we’re in the midst of a land price boom, labour costs are high in order to pay for housing.
Now, thanks to Amazon’s coming assault on margins, inflation will remain low and the RBA won’t be able to raise rates. Which, you guessed it, will keep house prices high.
Beautiful in its simplicity.
I only wish Amazon could somehow crack beer retailing. You struggle to get a pint of amber liquid in Melbourne these days for anything less than $10. $12–13 is pretty standard. It’s enough a drive a man to…sobriety.
But I digress. Where was I?
Oh yes, inflation, or the lack of it.
Another inflation inhibitor is the strong Aussie dollar. The rationale is that a strong Aussie dollar leads to cheaper imports, which keeps inflation pressures down. This sounds good in theory, and I don’t mean to harp on about it, but I don’t see imported beer prices going down…
Anyway, the strong dollar is now an issue for the RBA, whereas in the past it hasn’t been a big deal. Yesterday, the board met and decided to keep interest rates on hold for the 12th consecutive meeting.
And the dollar weighed heavily in their deliberations. As The Australian reports:
‘The slow pace of wage growth and the rising Australian dollar are emerging as threats to the Reserve Bank’s forecast that economic growth will average about 3 per cent a year over the next few years.
‘Governor Philip Lowe said the strength of the dollar over the past few months was already expected to suppress price increases, increasing the competitive pressure from imports.
‘“It is also weighing on the outlook for output and employment,’’ he said following yesterday’s bank board meeting in Sydney.
‘“An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.’’’
In other words, the RBA’s forecasts for economic growth are under threat. The bank expects growth to increase to 3.25% over the 2018 calendar year. With interest rates highly stimulatory and commodity prices healthy, the economy should certainly grow at a decent clip next year.
But a rising currency acts as a partial interest rate rise. And as I’ve pointed out previously, rising energy costs will hit businesses and consumers this year and beyond.
Given wages growth remains low, it’s hard to see how the household sector (the largest contributor to economic growth via consumption) will provide much of a boost next year. And as my highly scientific beer monitoring shows, there is plenty of inflation in day to day products. Even if the iPad I might buy once every five years has fallen in price.
Even my insurance bill for the car increased this year, despite a fall in the insured amount!
Another irony here is that low interest rates have actually caused the problems we now have. The RBA won’t dare move too quickly to raise them again. Otherwise the whole house of cards will come tumbling down.