Friday, February 5, 2016

RBA cautiously upbeat on economy but says China remains flashpoint

The Reserve Bank has delivered a cautiously upbeat report card on the Australian economy in the face of global financial turmoil.

But the RBA has repeated that despite local optimism, uncertainly about the outlook for China and the management of its economic slowdown remains a potential global flashpoint.

In its quarterly economic snapshot released today, the central bank has signalled qualified optimism about the local outlook given a falling jobless rate, low inflation, a lower Australian dollar and evidence the transition out of the mining boom is starting to take hold.

"Non-mining business investment is forecast to pick up in the second half of the forecast period, reflecting the improvement in domestic demand," today's statement says.

"There has been a noticeable improvement in labour market conditions that was not anticipated at the time of the previous statement.

The official unemployment rate for December fell to 5.8 percent after peaking at 6.3 percent during 2015, down by 0.5 percent.

"Also the low growth of wages is likely to have encouraged businesses to employ more people than otherwise," the RBA says.

The RBA also points to low headline and underlying inflation in addition to lower petrol prices caused by the plunge in global oil prices.

The outlook makes no material change to to economic growth outlook which it expects to increase gradually over the next two years to "be a bit above the decade average."

The RBA expects growth remain steady at between 2.5 and 3.5% to December 2016, slightly better that the forecast in November with headline inflation of between 2 and 3 percent for the same period.

However, the RBA says uncertainty about China and concerns about its economy remain a key focus for Australia.

"The outlook for China continues to be a key source of uncertainty for the forecasts," the RBA says.

"The recent bout of global financial market volatility has been characterised in part by concerns about the evolving balance of risks in China and the ability of Chinese authorities to manage a challenging economic transition.

"Any sharp slowing in economic activity in increase in the financial stresses in China could spill over to other economies in the region."

The RBA has warned that any unexpected fallout from China would "adversely affect commodity prices including those that are important to Australia" such as iron ore.

While plunging oil prices have damaged the balance sheets of global giants like BP and Royal Dutch Shell, the RBA believes lower oil prices will continue to support growth in Australia's major trading partners.

The RBA repeated the easing bias contained in Tuesday's interest rate decision when the cash rate was left steady at the historic low of two percent.

"Continued low inflation may provide scope for easier policy should that be appropriate to lend support to demand."

The RBA has also noted that significant steam appears to gone out of the hot real estate markets in Sydney and Melbourne.

It says building approvals have declined but remain at still high levels while housing prices "have declined a little" and auction rates have fallen.

Tuesday, February 2, 2016

Commodities crunch sees BHP Billiton hit with rating downgrade

The commodities crunch has dealt a serious blow to the credit risk profile of BHP Billiton.

The ratings agency Standard & Poor's has downgraded BHP's credit rating to A from A plus to reflect changes in forecasts for commodity prices.

In a statement, Standard & Poor's said the decision reflected "very challenging market conditions and increased demand uncertainty over the coming years".

Listen to my analysis from this morning's edition of "AM".

"Metal prices have come under pressure because of fears of lower demand from China, and excess supply remains an issue," S&P said.

"Particularly relevant for BHP Billiton, the oversupply of crude oil in the market results in very weak oil and gas prices, which we now believe will last over the foreseeable future, putting further pressure on its balance sheet."

S&P has also placed BHP on "credit watch with negative implications" and has signaled the miner's rating could be taken a notch lower after it releases its earnings later this month on February 23.

BHP responded to the downgrade saying it "has the strongest credit rating in the sector and remains committed to maintaining its strong balance sheet through the cycle."

The S&P downgrade comes as BHP struggles to maintain its progressive dividends to shareholders in the face of global turmoil and falling commodity prices.

BHP chairman Jac Nasser late last year refused to guarantee the progressive dividend would survive but said it as an "important distinguishing feature" for the company.

BHP maintains an A plus credit rating at Fitch Ratings and an "A1" assessments at Moody's which has the miner on review for a downgrade.

The miner's shares have plunged as result of the commodities crunch and fears about China's economy.

BHP shares ended 0.65 percent lower yesterday at $15.25

Monday, February 1, 2016

ACCC pursuit of Woolworths to be long and complicated

View from Level 18, Federal Court in Sydney. Justice Yates is taking the "long view: on ACCC case against Woolies

The Federal Court has laid out a what could be a long and complicated timeline as the competition watchdog pursues Woolworths over its tactics against supermarket suppliers.

Justice Yates has issued deadlines on when both Woolworths and the Australian Competition & Consumer Commission (ACCC) must file their respective cases and produce documents.

Highlighting the complex legal issues, Justice Yates said in the order issued on Friday that a hearing date for the case would not be set until after 4 August this year.

The ACCC instituted proceedings against Woolworths last December alleging it had engaged in unconscionable conduct when dealing with a large number of its supermarket suppliers.

The regulator is alleging that in December 2014, Woolworths senior management approved a scheme known as "Mind The Gap" as part of an urgent drive to reduce an expected shortfall in gross profit.

The ACCC alleges Woolworths sought $60.2 million in payments and that while some suppliers were expected to refuse, it knew some suppliers would ultimately agree.

It is alleged that the requests were made when Woolworths was "in a substantially stronger bargaining position than the suppliers" and that not agreeing to a payment would be seen as "not supporting" Woolworths.

Back in December, ACCC chairman Rod Sims said Woolworth's conduct was unconscionable and in breach of Australian Consumer Law.

The first deadline is on 15 February when Woolworths is expected to file its defence with the court.