Economic Insights

Economics | September 29 2015

Volatility reigns: Shares, petrol, consumer sentiment

Weekly petrol report; Weekly consumer sentiment
Sharemarkets slide: US and European sharemarkets fell by between 2-3 per cent overnight and similar
declines are occurring in Asia today.
Petrol prices: According to the Australian Institute of Petroleum, the national average Australian price of
petrol fell by 0.5 cents per litre to a 6-month low of 129.2 cents per litre in the week to September 27.
Consumer sentiment: The ANZ/Roy Morgan consumer confidence rating fell by 3.4 per cent in the latest
week after rising by 8.7 per cent in the previous week (the biggest weekly gain in the 7-year history of the
survey).
The petrol figures have implications for retailers, especially petrol marketing groups. The consumer confidence figures have
implications for retailers, and other consumer-focussed businesses.

What does it all mean?

Volatility reigns on global sharemarkets. The reason is simple European and US sharemarkets remain overvalued and investors are on the look-out for downside, rather than upside risks. After gaining around 2.5 per cent
on Friday, European sharemarkets fell by around 2.5 per cent on Monday. Were there any new events to prompt
the retracement? No, nothing to prompt a fall of 2.5 per cent, just as there were no prompters of the gains on
Friday. Rather the perennial concerns continue to dominate: uncertainty about the timing of US rate hikes and
concerns about the health of the Chinese economy.

US economic data overnight was generally positive higher personal incomes and spending. Interestingly
investors chose to focus on a measure of Chinese industrial profits overnight an indicator that generally attracts
little attention. The two other relative new issues (over the past week) are both negatives worries about new
controls on drug pricing in the US and the emissions scandal affecting Volkswagen. At present the news flow is
overwhelmingly negative.

Broadly, US & European sharemarkets are over-valued by around 10 per cent, so investors wont be feeling more
comfortable until prices settle at lower levels or unless they have reason to be more positive about the earnings

Craig James Chief Economist (Author)

Twitter: @CommSec
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Economic Insights: Volatility reigns: Shares, petrol, consumer sentiment

outlook of major corporations.

A pull-back in consumer confidence was to be expected

after the record gain in the previous week. Has anything
changed? The short answer is no. The new
administration in Canberra is getting down to work;
volatility continues on global financial markets; and the
Aussie dollar has softened further. Overall, consumers
are saying their finances are OK compared with a year
ago and the outlook for finances over the next year
remains above longer-term averages.

The good news for motorists is that the national average

petrol price stands at 6-month lows. The bad news is that
this in an average in practice actually only Darwin
prices are at this six month lows. Still, one thing that
capital cities have in common is the fact that petrol prices
are well down on a year ago some significantly, such as
Darwin, Melbourne and Canberra.

Will prices stay at these lows? Unfortunately given the volatility of global and regional oil prices, the best guidance
is that prices will remain broadly around current levels, but they have potential to bounce around a bit. In the past
six weeks the terminal gate or wholesale price has held in a 10 cent range of 113-123 cents a litre.

What do the figures show?

Petrol prices

According to the Australian Institute of Petroleum, the national average Australian price of petrol fell by 0.5
cents per litre to a 6-month low of 129.2 cents per litre in the week to September 27. The metropolitan petrol price
fell by 0.1 cents to 128.0 cents per litre and the regional price fell by 1.2 cents to 131.7 cents per litre.

The national average Australian price of diesel petrol fell by 0.2 cents to 129.3 cents per litre in the week to
September 27. Last week the metropolitan price fell by 0.1 cents to 127.0 c/l, while the regional average price fell
by 0.3 cents to 131.1 c/l.

Average unleaded petrol prices across states and territories over the past week were: Sydney (up 0.4 cents
to 130.9 c/l), Melbourne (down 6.0 cents to 120.6 c/l), Brisbane (up 10.2 cents to 132.3 c/l), Adelaide (down 4.3
cents to 128.6 c/l), Perth (down 1.3 cents to 129.0 c/l), Darwin (down by 0.2 cents to 130.4 c/l), Canberra (down
1.2 cents to 131.2 c/l) and Hobart (down by 0.3 cent to 136.9 c/l).

Today, the national average wholesale (terminal gate) unleaded petrol price stands at 119.5 cents a litre, up
around 2.0 cents a litre on a week ago. The terminal gate diesel price stands at 114.6 cents a litre, up around
0.6 cents over the week.

Last week the key Singapore gasoline price rose by US50c or 0.8 per cent to US$65.75 a barrel. Yesterday the
Singapore gasoline price rose to US$66.00 a barrel. In Australian dollar terms the Singapore gasoline price last
week rose by $3.15 a barrel or 3.5 per cent to $93.66 a barrel or 58.91 cents a litre.

Consumer sentiment

The ANZ/Roy Morgan consumer confidence rating fell by 3.4 per cent in the latest week after rising by 8.7 per
cent in the previous week the biggest weekly gain in the 7-year history of the survey. Confidence is down 2.6
per cent over the year and just below the average level of 111.5 recorded since 2014.

September 29 2015

Economic Insights: Volatility reigns: Shares, petrol, consumer sentiment

All of the five components of the index fell in the latest

week:
The estimate of family finances compared with a year
ago was down from +10 to +8;
The estimate of family finances over the next year
was down from +27 to +23;
Economic conditions over the next 12 months was
down from +3 to -5;
Economic conditions over the next 5 years was down
from +10 to -8;
The measure of whether it was a good time to buy a
major household item was down from +23 to +19
points.

What is the importance of the economic data?

Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of
Petroleum (AIP). National average retail prices are calculated as the weighted average of each State/Territory's
metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol
vehicles in each of these regions. AIP data for retail petrol prices is based on available market data supplied by
MotorMouth.

The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne
Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is
now closely tracked by the Reserve Bank.

What are the implications for interest rates and investors?

The Reserve Bank has no great concerns about consumer sentiment. Note that policymakers are more focussed
on questions related to household finances rather than the outlook for the economy. And the two key components
are above longer-term averages.

If you use the forward price-earnings ratio as your guide, fundamentally the Australian sharemarket is fairly
valued. Australian balance sheets remain in good shape with companies keen on providing dividends to their
shareholders. And companies generally remain positive on the outlook for earnings growth.

The price of petrol wouldnt be pressing on consumer minds at present. While bouncing around across capital
cities with the discounting cycle, petrol prices are still down on a year ago and not far away from the lowest levels
in six months. The petrol price is not a constraint on household budgets, so should be supportive for retailers and
consumer spending.

While Chinese industrial profits fell in August, part of the decline reflects exchange rate changes while activity was
also affected in August by the World Athletic Championships in Beijing, causing closure of factories.

Craig James, Chief Economist, CommSec

Twitter: @CommSec

September 29 2015