THE WEEK AHEAD: Full speed ahead for 2010

People in other parts of the globe will be glad to see the back of 2009 – particularly those in the US, UK and Europe. But here in Australia, 2009 wasn’t all gloom and doom, in fact for many consumers and investors 2009 was a very good year indeed.

Take the broader economy. While economic growth in Australia slowed – dragged down by weakness abroad – the Australian economy kept growing, avoiding recession yet again. It is now been over 18 years since Australia has experienced a full-blown recession. And while the unemployment rate edged higher in 2009, the current rate of 5.7% is only modestly above the 5% level that is regarded as ‘full employment’.

For first home buyers, 2009 was certainly a very good year. State and federal governments were falling over themselves in the rush to provide grants to home buyers. At the same time interest rates hit near 50-year lows in April, holding at those super-low levels until October. While the Reserve Bank lifted cash rates over October-December, they remain over one percentage point below longer-term averages.

Consumers, more generally, also have little to complain about in 2009. Retailers were actively discounting prices over the year to get shoppers to part with their dollars and wages outpaced prices for yet another year. We have to go back more than 18 years to find a period where inflation grew at a faster pace than wages. Even the petrol price remained low – in fact average pump prices over the year were the lowest since 2005.

Investors certainly had a good year after an early bout of weakness. From the low point in early March, the Australian sharemarket has rebounded by 56%. And for 2009 as a whole the All Ordinaries looks like posting gains of around 32% – the strongest increase in 16 years.

So what lies ahead? Interest rates could rise by around another percentage point in 2010 before they get back to more normal levels. The sharemarket should keep clawing its way back towards the late 2007 peak, lifting from around 4,850 points to 5,600. The jobless rate should end 2010 lower, around 5-5.25%. But, as always, the currency is the hard one to pick. Our CBA currency strategists are still tipping US98 cents by June 2010. But with the US economy recovering earlier than expected, that target may prove too high.

The week ahead

The New Year kicks off with a bang with around half a dozen indicators due for release in the coming week. The Performance of Manufacturing index (PMI) is released on Monday followed on Tuesday by new home sales figures from the Housing Industry Association. On Wednesday building approval data and the Performance of Services index are issued while international trade and retail spending figures are slated for Thursday.

According to the PMI, the manufacturing sector has expanded for the past four months. That is, the PMI has been above 50 since August. But while the domestic and global economies are strengthening, a major headwind for manufacturers is the high level of the Aussie dollar.

The housing indicators for November should show reasonable strength, underpinned by the first home owners boost. We expect that new dwelling approvals rose for the fifth time in six months, up 4% with new home sales also likely to have lifted after two sizeable monthly declines.

The monthly trade figures don’t generate too much attention nowadays, but for what it’s worth another deficit is on the cards. We expect that the trade accounts were in the red by around $1.5 billion, although this is an improvement from the $2.4 billion shortfall in October.

The indicator likely to generate most interest over the week is retail trade. Unfortunately the data covers November rather than the all-important Christmas period, but it will give a sense about how retailers were travelling ahead of the major sales period. We expect that sales lifted 0.5% with seasonal buying underpinned by the warm start to summer.

In the US, the spotlight shines brightly on the monthly jobs data – the non-farm payrolls figures to be released on Friday. It’s fair to say that the November figures came as something of a shock to analysts with employment falling by only 11,000. The last time that employment grew was exactly two years ago so investors are hoping the anniversary will be celebrated by a return to job creation. The average forecast is centred on a flat result – no jobs created, but none lost either.

The other indicators to focus on over the week are the ISM manufacturing gauge on Monday, and the ADP employment report and ISM services gauge – both to be issued on Wednesday.

In addition, construction spending figures are released in the US on Monday with factory orders, pending home sales and car sales on Tuesday. The Challenger job lay-off series is released on Wednesday. A host of Federal Reserve officials also give speeches next week including chairman, Ben Bernanke, on Sunday (January 3).

Sharemarket

It’s been a much better year for world sharemarkets. The Morgan Stanley Capital International world index has risen by 28% in 2009 after falling by just over 42% in 2008. Australia looks to be finishing in around 40th spot of 72 bourses monitored with the All Ordinaries index up 32.7%. The strongest sharemarket is Russia, up 128%, followed by Sri Lanka, up 123%. Asian sharemarkets clearly out-performed in 2009 after finishing towards the bottom of the leader-board in 2008.

Just two sectors of the Australian market went backwards in 2009 – telecom (down 9%) and pharmaceuticals and biotech (down 4%). The stand-out sector has been retailing (up 85%) with banks, software and services, media and materials all high on the leader-board.

Interest rates

Across the world in 2009, interest rates fell to amazingly low levels – if not record lows, at least the lowest in a generation. In Australia, average interest rates across the yield curve were the lowest in around 50 years. The cash rate averaged 3.27% in 2009 – the lowest calendar year result since 1960 when rates averaged 3.24%. At the other end of the yield curve, 10 year bond yields averaged 5.14% in 2009, the lowest result since 1968.

While individual banks lifted housing rates late in the year by more than the cash rate, on average the 6.02% variable mortgage rate in 2009 was the lowest in 30 years. You have to go back to 1969 when the mortgage rate averaged 5.88% to find a better year for home buyers.

Currencies & commodities

Over 2009 the Australian dollar has been the fourth strongest currency. Since the start of the year the Aussie has lifted just over 21% against the greenback, behind the Seychelles rupee (up 30%), Brazilian real (up 25%) and South African rand (up 22%).

While the US dollar has regained some ground late in the year, overall all but 35 of 120 currencies monitored are finishing 2009 stronger than where they started. The weakest currency was the Ethiopian birr, down 29% against the greenback, followed by the Mongolian tugrik, down 12%.

Base metals have been the best performing commodities in 2009 by a large margin. Since the start of the year, lead has lifted 139%, followed by copper, up 138% with zinc up 113%. But sugar prices have also soared, up 129%, while oil prices rose by 77%. Gold rose by just 24% in 2009.

Craig James is chief economist at CommSec.