THE WEEK AHEAD: Will business investment rise?

There is one stand out event in the coming week, namely the June quarter business investment figures, released on Thursday. Apart from that key indicator it is a rather tame affair on the economic calendar with car sales data released on Monday and construction work figures released on Wednesday.

While the investment figures will hog the spotlight, the key question is whether the data will incorporate the recent improvement in business confidence and conditions. The survey is conducted over July and August but the sharp lift in confidence levels may not yet have translated to actual spending plans. There certainly is anecdotal evidence that companies are re-starting projects, but it is early days in the recovery process.

Overall, we expect that spending on equipment and buildings probably fell by around 8% in the June quarter, restraining overall economic growth in the quarter. In terms of future spending, an estimate near $77 billion for the 2009/10 year would be considered a positive result. While a softer result would be discounted, interestingly a firmer result would be seized upon as further evidence of economic resilience, and add to rate hike speculation.

The car sales figures for July will be heavily influenced by the Government’s tax break for business. In June, companies spent up big on motor vehicles on the fear that the tax break wouldn’t be extended. So expect the pull-forward effect to translate to a drop in July sales. We expect that car sales fell by around 6% in seasonally adjusted terms in July after rising by 5.7% in June.

While a hefty drop in car sales is expected, it would only be the first fall in four months. And given that the Government has extended the tax break, firm sales results can be expected over the remainder of 2009.

The construction work figures not only provide the residential building component of the GDP (economic growth) equation for the June quarter, it will also give a sense of the volume of work yet to be done. The only caveat – as for the investment data – is that companies will likely be adding to work levels in coming months given the sharp improvement in business conditions.

In the US, the economic calendar is much better stocked than in Australia. On Monday the Chicago MidWest survey is released. On Tuesday, data on consumer confidence is issued, together with house prices and the Richmond Fed survey. On Wednesday, data on durable goods orders is released, together with new home sales. The updated (preliminary) estimate of GDP (economic growth) for the June quarter is released on Thursday with personal income and spending figures issued on Friday.

US consumer confidence probably improved modestly in August with house prices lifting for the second straight month in June. Results in line with these expectations should be favourable for sharemarkets. And while the US economy probably contracted at a 1.4% annual rate in the June quarter, investors are already looking past these figures to growth in the September quarter.

Firmer results are also expected for durable goods orders, new home sales, personal income and personal spending, giving investors good reasons to be more confident about the economic picture.

Sharemarket

The profit reporting season winds down over the coming week. So far the results have been decidedly mixed, with around a third of companies producing results above expectations, a third in line, while a third have fallen short of analyst expectations.

On Monday, Centrebet and Fairfax Media are expected to report earnings. On Tuesday, Aristocrat Leisure, Crown, Flight Centre, Foster’s, Suncorp Metway, Macquarie Airports and Mirvac are amongst those to report. It’s a big day for earnings on Wednesday with Asciano, Centro, ConnectEast, Consolidated Media, Goodman Fielder, Healthscope, Transfield, Transurban and Westfield slated to report. Ramsay Health Care, Toll Holdings, Virgin Blue and Woolworths are listed to report on Thursday with Caltex, Harvey Norman and Sonic Healthcare on Friday.

Interest rates

At the height of the global financial crisis woes in October last year, interbank lending rates soared. Lehman Brothers collapsed and banks became less confident about lending to each other. The three-month US dollar Libor rate hit highs of 4.82% on October 10, up from levels around 2.80% in mid-September. The lofty rates didn’t last for long, but it has been a relatively drawn-out easing process. Still, the good news is that Libor rates hit record lows of just under 0.43% late last week.

There will be little guidance for domestic rate settings over the coming week. While the capital expenditure figures will be closely watched, the improvement in business conditions has probably occurred too recently to be fully reflected in future spending plans.

Currencies & commodities

The Aussie dollar is expected to remain in its comfortable range of US80-85 cents until the end of the year. The main risk is for a break-out on the upside as investors focus on Australia’s role as a global energy exporter.

Craig James is the chief economist at CommSec.