Australia - Common Economic Statistics

Official Cash Rate

The Cash Rate is the rate financial institutions charge other financial institutions for overnight loans in the Australian banking system. This is a fundamental trend-setting rate and changes to this rate are reflected in other interest rates including commercial bank rates. The Cash Rate Target is the rate that the government feels is appropriate given the current economic conditions.

The Board of the Reserve Bank of Australia (RBA) decides on a target for the Cash Rate after determining the monetary policy it intends to pursue. The actual Bank Rate is a result of the demand for, and the supply of, funds in the overnight lending facilities. Individual lenders are free to set their own rates but in order to remain competitive, the rates vary only slighter from lender to lender.

The RBA does not impose or dictate the Cash Rate directly, but it can make use of open market operations to influence the Cash Rate. This in turn, trickles down through the entire banking system so that an increase in the Cash Rate typically results in an increase in other interest rates in the country. The RBA’s use of open market operations consists of exercising it’s control over the supply of funds used by the banks and financial institutions to settle transactions with each other. These funds are held at the Reserve Bank in what are known as exchange settlement funds.

If the RBA determines it is necessary to follow a policy that reduces the Cash Rate, then the Bank will increase the supply of funds in a bid to over-supply the banks. By supplying more exchange settlement funds than the commercial banks wish to hold, they will look to reduce their cash holdings by increasing the amount of funds they lend in the cash market. This increase in supply often leads to a drop in the cash rate as lenders may be willing to accept a lower return in order to attract borrowers in an attempt to undercut other lenders.

On the other hand, if the Reserve Bank wants to increase the Cash Rate – perhaps to deal with rising inflation concerns – the Bank may opt to decrease the supply of funds. This will lead to higher lending rates (i.e. the Cash Rate), and when financial institutions lend each other overnight funds, this extra cost will be reflected in increased commercial rates thereby meeting the Reserve Bank’s objective of increasing interest rates. The expected result is that consumers and businesses will delay major purchases in the hopes that interest rates will decline resulting in a reduction in spending which should ease inflationary pressures.

Overnight Indexed Swaps

An interest rate swap that exchanges the revenue generated by the two legs of the agreement. One party pays an agreed-upon fixed interest rate for the notional amount in exchange for the interest that same amount earns using the Australian Overnight Cash Rate as the floating rate.

An interest rate swap is based on the concept of a basic interest rate swap whereby two counterparties agree to exchange (i.e. “swap”) the accrued interest on a set notional amount (the principal), in exchange for an agreed upon fixed interest rate for a specified time period. Each side of the swap is referred to as a leg, where one leg is tied to a floating market return (the Reserve Bank of Australia Overnight Cash Rate in this case) while the other leg is fixed to an agreed-upon fixed rate.

Overnight indexed swaps are generally short-term in nature ranging from one week to no more that one year. Typical interest rate swaps provide for a stream of payments but overnight indexed swaps usually require a one-time payment at the time the swap agreement matures. Overnight indexed swaps are used by financial institutions as a means to limit their exposure to changes in the overnight cash rate as they can guarantee a specific return on the principle they offer as the underlying security in the swap agreement. Using swaps in this manner significantly reduces their risk as no actual amount of principal is actually exchanged.

Yield Curve

The yield curve plots the return on fixed income instruments. The shape of the curve illustrates the relationship between expected yields and time to maturity.

Bond yields are based on the duration of the bond (i.e. the time to maturity) and the creditworthiness of the issuer. In order to attract investors, non-government bond issuers must offer a higher return as these securities carry greater risks than bonds backed by the government and investors expect some form of premium in return for accepting the additional risk.

Long-term bonds are also at risk of losing value through a diminishing of the liquidity spread. This term refers to the difference between the bond yield and short-term interest rates. As interest rates rise, the locked-in yield of a bond becomes less valuable as it does not adjust higher to compensate for the rising interest rates, thereby reducing the true value of the return. If short-term interest rates rise above the yield, the investor actually has a negative liquidity spread.

Normal Yield Curve

A so-called “normal” yield curve is one that curves upwards in a concave manner. This indicates an increase in the yield (the x axis) as time to maturity (the y axis) increases. This follows the tenant of the Arbitrage Pricing Theory that states that the longer the term to maturity, the higher the yield. This approach rewards investors willing to lock their money into long-term bonds despite the increased risks noted earlier.

Flat Curve

A flat yield curve results when the yields are basically the same for all maturities. This indicates that investors are willing to accept yields on long-term instruments that do not include a premium above current short term yields. Investors would only accept this if they feel that the economy has little capacity for growth combined with the likelihood that interest rates will not rise.

Inverted Yield Curve

An inverted yield curve that slopes downwards over time indicates a negative outlook for the market in the long term and could suggest the onset of a prolonged economic downturn or possible recession. An inverted yield curve shows even greater long term pessimism than a flat curve – so much so that long-term bond yields actually fall below short-term yields (negative liquidity spread). The implication is that investors are willing to lock in investments at the current rate in the belief that yields will lower dramatically in the face of a worsening economy.

Humped Curve

A “humped” curve occurs when both short and long tem yields are equal but medium term yields are higher. This could indicate an expectation that the economy may be entering a period of growth but this growth is not expected to be sustained for the long term.

Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is the total value of all goods and services produced within the borders of a country for a given period of time. Everything produced in the country is counted without regard to the nationality of ownership of the firms producing the goods – in short, if it is produced within the country’s borders, it is counted as part of the GDP.

An increase in GDP is seen as a positive indicator suggesting that the economy is growing. This often results in increased demand for the dollar and could see an increase in value in the FX markets. As the value of a country’s production increases, a corresponding increase in the workforce is likely which suggests greater employment and higher incomes.

There are shortcomings in this assumption however, as volunteer work is not included in the basic GDP calculation; nor is work performed in the so-called underground economy. In this case, work done “under the table” or in exchange for other goods or services is not part of the GDP results.

Real GDP Versus Nominal GDP

When the value of goods and services from one time period is compared to another, changes in the inflation rate can account for some of the difference between multiple GDP results. In order to make it clear whether or not inflation has been factored in, economists use the term Real GDP to indicate GDP results that have been adjusted for inflation. This is the approach that best enables economists to determine if the economy has increased or contracted when compared to previous results.

GDP figures that have not been adjusted are usually referred to as Nominal or Current Dollar GDP amounts.

Gross Domestic Product (Change)

Gross Domestic Product (GDP) is the total value of all goods and services produced within the borders of a country for a given period of time. Everything produced in the country is counted without regard to the nationality of ownership of the firms producing the goods – in short, if it is produced within the country’s borders, it is counted as part of the GDP. This chart shows the percent change in GDP from the preceding quarter.

An increase in GDP is seen as a positive indicator suggesting that the economy is growing. This often results in increased demand for the dollar and could see an increase in value in the FX markets. As the value of a country’s production increases, then a corresponding increase in the workforce is likely which suggests greater employment and higher incomes.

There are shortcomings in this assumption however, as volunteer work is not included in the basic GDP calculation; nor is work performed in the so-called underground economy. In this case, work done “under the table” or in exchange for other goods or services is not part of the GDP results.

Retail Trade

The Retail Trade report provides feedback on the total value of goods and services sold directly to consumers. This is one of the first indicators available each month that tracks spending behaviors. An increase in Retail Trade is seen as an indication of growth in the economy and this tends to support the value of the Australian dollar on the currency markets.

The Retail Trade report includes a breakdown of sales by various sectors and is produced each month. A rising trend is a positive sign of growth in the economy and shows that consumer demand remains strong suggesting that consumers are confident they can increase retail expenditures without compromising their ability to afford important basics such as food and shelter. The dollar can be expected to maintain or even gain value with a positive Retail Trade report.

A dramatic increase in retail spending over a short timeframe can be a sign of an economy expanding to the point where inflation becomes a concern. To combat this, governments typically tighten monetary policy by raising interest rates to make borrowing more costly in the hopes that spending will moderate. Higher interest rates also mean higher returns for the native currency so investors often increase holdings in currencies with higher interest rates thereby pushing up demand for the dollar.

In addition to the obvious impact that increased retail sales can have on the economy, it is also relevant to consider that the retail sales sector is Australia’s largest employer. Strong retail sales results suggest that it is likely that the economy can support the current employment levels and possibly even create additional positions.

Consumer Price Index (CPI)

The Consumer Price Index (CPI) is considered one of the most effective measures of inflation within an economy. Inflation is a necessary part of economic growth, but inflation exceeding 2% is generally seen as detrimental due to the erosion of the buying power of the nation’s currency. When high inflation becomes a concern, investors abandon the currency in search of other investment options thus lowering the demand for the nation’s currency.

CPI is a consumer-level analysis of the cost to buy a set basket of goods and services and is based on a starting index value of 100. If the CPI for the current period is 112 for instance, it means that it now costs 12% more to buy the same basket of goods today than it did when the index was first established. By comparing the monthly CPI data, you can easily detect changes in consumer buying power from month to month.

Core Consumer Price Index (Core CPI)

Based on the Consumer Price Index, the Core CPI excludes volatile items such as energy and food which can distort the CPI figures should there be a sudden spike in oil prices or other unexpected event. By eliminating those items that often skew inflation statistics, the Core CPI is looked upon as a more reliable means of forecasting inflation than simply the CPI.

Producer Price Index (PPI)

Measures the change in prices for goods sold by the manufacturer using an index of 100 as the base. Unlike the Retail Trade figures, the PPI does not include taxes or any other shipping or distribution fees typically added as products move through the supply chain. An increase in the PPI index suggests an expanding economy with reasonable assurances of continued employment for those working in the manufacturing sector.

The PPI has a high market relevance and is closely watched as an indicator of current inflation levels. Like other inflation-based indicators, increasing PPI values could signal an interest rate hike intended to combat inflation. A possible interest rate hike may increase demand for the currency as an investment option as investors can expect increased returns as interest rates rise.

Employment

Measures the change in employment levels between consecutive reporting periods. A decrease in employment is seen as a negative indicator as job losses are typically triggered by a lower demand for goods and services.

The obvious impact of falling employment is a decline in consumer spending as government unemployment benefits do not cover the full wages workers earned earlier; a reduction in spending is an immediate response by affected households.

Add to this the fact that workers currently employed but feeling vulnerable with respect to their continued employment, also typically reduce spending in a bid to boost savings to prepare for possible job loss. This behavior further reduces consumer spending and can actually fuel additional layoffs.

Employment Change

Tracks changes in the employment rate from month to month. Rising employment suggest economic growth and increased capacity for consumer spending.

As employment increases in an economy, inflation becomes a concern as overall consumer spending is likely to increase. To ward off inflation, central banks typically increase interest rates making it more costly to borrow money for major purchases and this often reduces the inflation threat. It also tends to increase the value of the currency against weaker currencies as investors can expect a greater return on savings.

Unemployment Rate

The percentage of individuals eligible for work and are currently looking for employment but unable to secure a position. Rising unemployment is a negative indicator that foreshadows a probable reduction in consumer spending.

For this report, the term unemployed refers to individuals of working age who did not receive payment for work-related or self-employment activities during the survey period. Also, the individual must have been available for work during this time and must have been actively looking for employment.

Students and homemakers, as well as others engaged in full-time pursuits not traditionally considered a typical wage-earning activity, are also considered unemployed if they meet the conditions of the definition above. In other words, a student of working age not currently employed but looking for work may be regarded as unemployed.

The obvious impact of rising unemployment is a decline in consumer spending due to a reduction in wages earned. Add to this the fact that workers who are employed but feeling vulnerable with respect to their continued employment typically reduce their spending in a bid to boost savings to prepare for possible job loss. This behavior further reduces consumer spending and can actually fuel additional layoffs.

Unemployment Rate (Change)

Tracks changes in the unemployment rate from month to month. Rising unemployment is a negative indicator that foreshadows a probable reduction in consumer spending. Also, workers who feel their positions may be vulnerable may reduce their spending to boost savings to see them through a period of unemployment. For these reasons, employment levels are viewed as an important economic indicator.

Wage Price Index

Measures the change in wages and is published each quarter and expressed as in index compared to the base (reference) year. Used as a means of understand the cost borne by employers to pay staff.

The Australian Bureau of Statistics (ABS) publishes a series of four wage price indices for each quarter, but the one most closely examined, reports the total hourly equivalent for rates of pay, excluding bonuses and other performance-related payments.

Trade Balance

Compares the total value of imports and the total value of exports for the reporting period. A negative value indicates that more goods were imported than were exported (trade deficit) – conversely, a positive trade balance means that exports exceeded imports (trade surplus). This report is used by currency investors to determine demand for the dollar.

In the case of a trade surplus or a decreasing trade deficit from the previous month, it naturally follows that countries importing goods must convert their currency to the domestic currency of the country supplying the goods. This results in an increased demand for the domestic currency thereby increasing its value.

In the case of a trade deficit or a trend towards a decreasing trade surplus, the importing country must convert more of their currency to the currency of the country from which they are buying goods. This leads to an increased supply of the domestic currency on the FX markets which could cause the domestic currency to lose value against other currencies.

Current Account

Shows the total inflow of new capital into a country. It is calculated as the total trade balance (exports minus imports), plus the net of income payments (interest and dividends), plus all unilateral transfers (foreign aid, taxes, and one-way gifts).

If the resulting number is positive, it shows a Current Account surplus; a negative value is a Current Account deficit. Note that a deficit means that more money left the country than entered the country in the form of exports and other transfers.