Testifying in front of the Joint Economic Committee of Congress, the three key parts of the Fed’s monetary policy were mentioned in very blunt and straight terms: ‘Many Americans who want a job are still unemployed’; ‘inflation is below the central bank’s 2% target’ finishing with ‘a high degree of monetary accommodation remains warranted.’
This virtually guarantees the Fed funds rate will remain at or near zero to the end of 2015. Her justifications are easy to quantify, although unemployment fell to 6.3% and the non-farm payrolls saw 288,000 jobs added last month. The participation rate fell to its lowest level since 1978 meaning over 800,000 people fell out of the jobs market. What will also be impacting the Fed’s inflation target is wage growth. The average hours worked also referred to as average hourly earnings is stagnating - 0.1% in February 0.0% in March. Americas are working more for less and this means consumer power is not progressing at a rate that will see 2% inflation.
One side of the participation rate that is becoming apparent in the developed world is that baby boomers are starting to retire and are dropping out of the employment pool. The pressures of how to fund these people through pensions and other government schemes is going to be an interesting development over the coming five to ten years, and something governments are struggling to grapple with. Budget night will be interesting.
It will also mean that future investment funding will become more and more important as boomers and then generation X start to look to retirement and how they fund their lifestyles.
Employment will be the theme of the day, as Australia looks to the unemployment rate and employment change. Expectations are for the unemployment rate to tick up to 5.9%, which is likely to see the very violent employment change read fall away. Like the US however, it’s the participation rate that might demand the most attention as it has been falling consistently over the past year. The AUD has been mixed and this might be a negative pressure.
National Australia Bank
NAB has come under pressure from investment bank forecasts over the past month and it is understandable as the bank is running at the thin edge of the margins, which has certainly come home to roost. Net interest margins have fallen to 1.94%, down nine basis points which is on par with the regional banks, and four basis points below consensus. Consensus forecast for cash earnings was for a 9% increase on the corresponding period to A$3.158 billion; cash earnings were A$3.150 billion, in-line but on the lower side. Total revenue of $9.487 billion is also in-line with estimates of A$9.49 billion. While the surprise here is the dividend of 99 cents, which was five cents ahead of consensus
The bright spots on the headline read are:
- UK assets are showing continued signs of improvement and will ramp up speculation of a possible spin off
- Bad and doubtful debts plummeted 52% to $528 million on the east coast recovery and the UK assets
- Strong capital generation and a tier-1 ratio that is improving to 8.67%
What looks to be disappointing across the results is the performance of the Australian business. Wealth management, while increasing funds under management, fell slightly quarter-on-quarter. This is despite the fact that CBA, WBC and ANZ are all championing their financial services prints. Australian margins are also struggling as NAB looked to ramp up its retail and business portfolios. Volume has improved, but it appears at the detriment of earnings. On the headline numbers it appears that NAB has again finished last in the four horse race.
Ahead of the Australian Open
We are currently calling the Aussie market up 27 points to 5462 on the 10:00am bell (AEST) as Yellen’s speech saw a global pick up. Iron ore however fell to its lowest level year-to-date and is only 0.8% off a 20-month low which could mute the read coming from BHP’s ADR which is calling for a the stock to possibly add 1.3%.