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Weekly Market Update – 7th June 2019

Weekly Market Update

Investment markets and key developments over the past week

  • Share markets, except for China’s, rose over the last week on increasing prospects for Fed rate cuts in response to the negative impact of trade wars. The Australian share market also saw a modest boost from the RBA cutting rates. The prospect of more rate cuts and easier monetary policy left bond yields flat to down. Commodity prices were mixed with oil and iron ore down but copper and gold up. The $A rose as the $US fell in response to the Fed moving towards rate cuts.
  • Lots of noise but still no end in sight for Trump’s trade wars. China’s white paper on trade wasn’t as harsh as feared but explained why they believe negotiations failed and repeated its position. Meanwhile, the threat of the trade conflict spreading to other areas continued: beyond rare earths and company blacklists to maybe even tourism and Trump using tariffs against countries that have devalued their currencies. Talks between the US and Mexico aimed at averting the US tariffs on Mexico from Monday have not made a lot of progress so far (but may yet) and while Congress may move to block these tariffs its not clear that it will be enough to override a presidential veto. Meanwhile, the US is imposing tariffs on India after ending its preferential trade status and President Trump was even reportedly thinking of slapping tariffs on Australian aluminium imports (which surprise, surprise had risen as tariffs went up on other countries!). Views remain that ultimately it will be in Trump’s interest to negotiate solutions to the trade disputes but this may first require economic data and share markets to weaken further to the point that he worries that it will negatively impact his re-election prospects such that he is then forced to negotiate. Of course Trump may be thinking that its best to let the pain ramp up a bit to the point that the Fed eases several times and the Chinese give in to his demands at which point he can negotiate a deal, share markets and economic data rebound in response and he is re-elected as a hero next year. The risk for him is that China works out that he is thinking this and so digs in waiting for the trade war to weaken the US economy so Trump won’t get re-elected next year and they can try their luck with a more conventional president.
  • Fed rate cuts now looking likely – expect two this year starting in September. With the threat to growth from Trump’s trade wars rising, some US growth indicators weakening, the yield curve suggesting a rising risk of recession and inflation remaining below target, it is now likely to see two rate cuts from the Fed this year. Fed officials including Chairman Powell look to be moving in this direction and a likely shift to the Fed targeting 2% inflation on average (implying a period of catchup on the high side after periods of sub target inflation) will likely be a further push towards lower rates. The Fed is not there yet but unless there is a quick resolution to the trade wars, expect it to start cutting in the months ahead.
  • RBA cuts for the 13th time since 2011 to a new record low of 1.25% with more to come. Forecasts remain for another cut in July or August and the cash rate to fall to 0.5% by mid next year with an increasing risk that the RBA will have to employ quantitative easing or maybe even “helicopter money” beyond that point: March quarter GDP growth remained weak with annual growth at its weakest since the GFC; growth is likely to remain below 2% this year as housing construction falls further and consumer spending remains constrained as does non-mining investment; Trump’s trade wars threaten global growth and hence export demand; taken together this points to rising unemployment and ongoing significant spare capacity in the Australian economy; all of which will keep wages growth soft and inflation below target. So, to achieve its aim of lowering unemployment and boosting inflation the RBA likely has more work to do. Governor Lowe looks to be of on board with the need for more interest rate cuts, maybe not to as low as 0.5% but he could come round to that view as growth proves softer than the RBA is expecting driving more downwards revisions to their growth and inflation forecasts.
  • The RBA is cutting – so why has the $A not fallen? Put simply it was already anticipated by the fall in the $A from $US0.80 early last year to its recent lows, this was reflected in large short positions in the $A, the iron ore price still remains supportive of the $A and in the meantime investors have moved to price in 3 to 4 rate cuts from the Fed over the next year. That said, it is likely to still see the trend in the $A as down to around $US0.65 by year end as Australian growth is weaker than US growth, spare capacity is much higher in Australia (eg labour market underutilisation of 13.7% in Australia versus 7.3% in the US) which will keep inflation lower in Australia than the US and it is likely to see the RBA cutting more than the Fed. However, barring a global collapse the weakness in the $A is likely to take it to $US0.65 as opposed to down to say the 2001 low of $US0.48.
  • Renewed global monetary easing continued elsewhere with the ECB remaining dovish (albeit not as dovish as markets were hoping) and the Reserve Bank of India cutting rates again. Looks like bond yields are to remain lower for even longer.

Major global economic events and implications

  • US data was a mixed bag with a weaker manufacturing conditions ISM index but stronger non-manufacturing ISM, reasonable construction activity and still low jobless claims.
  • Conflict between the European Commission and Italy over the latter’s budget deficit blow out is back in the headlines with Commission starting the process towards an Excessive Deficit Procedure against Italy. This could ultimately result in a fine for Italy and the main pressure on Italy will come from not being able to get access to cheaper emergency funding if needed. However, it will have a long way to play out and may ultimately end in some sort of compromise.
  • Meanwhile the ECB announced generous terms for its next round of cheap bank financing. There was a further fall in unemployment to 7.6% in April and a rise in German factory orders but core inflation fell back to just 0.8%yoy in May.

Australian economic events and implications

  • Australian data was soft with March quarter GDP growth remaining weak with private sector spending in the economy falling for the second quarter in a row. Annual growth has now slowed to 1.8% year on year, its weakest since the GFC. While strong public spending, improving investment and strong net exports should help keep growth positive its likely to be constrained as the housing construction downturn continues and consumer spending remains under pressure. In terms of the latter retail sales fell again in April and car sales remained weak in May. On top of this ANZ job ads continued to trend down in May pointing to slowing jobs grow & April housing finance (while dated by the election result) remained weak.
  • The news wasn’t all negative. Flowing from a continuing large trade surplus Australia’s current account deficit has fallen to its lowest since the 1970s (meaning less reliance on foreign capital inflow) and the pace of decline in home prices slowed further in May according to CoreLogic. Views remain that the combination of the confidence boost from the election, rate cuts, a relaxed mortgage servicability test & help for first home buyers will help home prices bottom by year end but a quick return to boom time conditions is unlikely given still very high house prices and debt levels, continuing tight lending standards and a rising trend in unemployment. Meanwhile the housing construction cycle has only just started to turn down and lags the house price cycle and so still has a long way to fall.

Source: ABS, RBA, AMP Capital

Source: ABS, RBA, AMP Capital

What to watch over the next week?

  • In the US, apart from the noise around tariffs, the focus is likely to be on inflation and retail sales. Inflation data (Wednesday) is expected to show core CPI inflation unchanged at 2.1% year on year and retail sales (Friday) is expected to show solid growth of around 0.6% month on month. In other data releases expect job openings and hiring (Monday) to have remained strong, small business confidence (Tuesday) to dip slightly and industrial production (Friday) to rise.
  • Chinese data for May will help shed light on how the economy is holding up as the trade war returned. Expect to see falls in both exports and imports (Monday), stable but subdued growth in industrial production (+5.4%yoy) and investment (+6.1%yoy) and a rebound in retail sales growth to 8.1%yoy (all Friday) and continuing strength in credit growth. Consumer price inflation (Tuesday) is expected to rise to 2.7% year on year but underlying inflation is likely to remain soft.
  • In Australia the focus will be on confidence and jobs. Expect a bit of a post-election bounce in the NAB’s business survey (Tuesday), little change in consumer confidence (Wednesday) and a 20,000 gain in employment for May (Thursday) helped by electoral workers which is likely to have pushed unemployment temporarily back down to 5.1%.

Outlook for investment markets

  • Share markets are likely to see further volatility and weakness in the short term on the back of uncertainty about trade and mixed economic data. But valuations are okay, global growth is expected to improve into the second half if the trade issue is resolved and monetary and fiscal policy has become more supportive of markets and will likely become even more so all of which should support decent gains for share markets through 2019 as a whole.
  • Low yields are likely to see low returns from bonds, but government bonds remain excellent portfolio diversifiers.
  • Unlisted commercial property and infrastructure are likely to see a further slowing in returns. This is particularly the case for Australian retail property. However, lower for even longer bond yields will help underpin unlisted asset valuations.
  • National average capital city house prices are likely to remain under pressure from tight credit, record supply and reduced foreign demand. However, the combination of imminent rate cuts, support for first home buyers via the First Home Loan Deposit Scheme, the relaxation of the 7% mortgage rate serviceability test and the removal of the threat to negative gearing and the capital gains tax discount point to house prices bottoming out by year end and higher than expected. Expect to see a 12% top to bottom fall in national capital city average prices. Next year is likely to see broadly flat prices as rising unemployment acts as a bit of a constraint.
  • Cash and bank deposits are likely to provide poor returns as the RBA cuts the official cash rate to 1% by year end.
  • The $A is likely to fall further to around $US0.65 this year as the gap between the RBA’s cash rate and the US Fed Funds rate will likely push further into negative territory as the RBA moves to cut rates by more than the Fed does. Excessive $A short positions and high commodity prices may help drive a short-term bounce though before the downtrend resumes and will likely prevent an $A crash.

Source: AMP CAPITAL ‘Weekly Market Update’

AMP Capital Investors Limited and AMP Capital Funds Management Limited Disclaimer

FinSec Partners Disclaimer

Weekly Market Update – 31st May 2019

Weekly Market Update

Investment markets and key developments over the past week

  • Global share markets fell again over the last week on the back of worries about global growth in the face of the escalating US/China trade war, made worse by President Trump’s decision to put a 5% tariff from June 10 on imports from Mexico rising to 25% by October unless it stops illegal immigration. US shares lost 2.6% for the week, Eurozone shares fell 2% and Japanese shares lost 2.4%. Chinese shares managed to rise 1% over the week though helped by the prospect of more policy stimulus. The return of Trump’s trade war in early May put an end to the rally shares had seen since December with US, Eurozone, Japanese and Chinese shares all losing around 7% in May. Australian shares fell 0.9% over the last week as post-election euphoria faded with utilities, property, consumer staples and energy shares hard hit, but the election result boost still saw them rise 1% in May.
  • Bond yields fell further over the last week on the back of safe haven demand, growth fears, weak inflation and increasing expectations of monetary easing with the Australian 10-year bond yield reaching a new record low of just 1.46%. While the iron ore price rose slightly, copper and oil prices remained under pressure. The A$ was little changed as was the US$.
  • Trade threat escalating badly. Trade war fears continued to ramp up over the past week with President Trump saying he was “not yet ready” to make a deal with China and hints from China that it may stop exports of rare earth minerals to the US and reports that it will set up a blacklist of firms that hurt Chinese interests highlighting that the dispute is moving beyond tariffs and Trump opening a new tariff front with Mexico. China supplies around 80% of US rare earth imports and they are essential in sectors like defence and electronics. The US could retaliate by banning the sale of semiconductor chips to China. There is a chance that the tariffs on Mexico may be averted if Mexico and the US cut a deal on immigration or Congress intervenes but it’s hard to tell at this point. Imports from Mexico are around 14% of total US imports and the tariffs will wreak havoc with US companies supply chains if they are implemented particularly in the auto sector. Such a move coming soon after the US struck a new trade deal with Mexico will make China (and other countries) even more cautious in negotiating trade deals with the US. Business will wonder who in their supply chain will be disrupted next. Clearly this ongoing escalation is not good for business confidence, growth and profits. Share markets are likely to have to fall a lot further to make President Trump realise just how great the threat to the US economy and by implication his 2020 re-election prospects are (US Presidents don’t get re-elected when unemployment is rising). So, shares likely face more short-term downside as the trade conflicts will likely get worse before they get better. The “great negotiator” (President Trump) surely realises that he won’t look so great if all he has to show for his trade wars is rising unemployment.
  • Back to business as usual after the EU parliamentary elections failed to see a populist/Eurosceptic surge. While the centrist parties lost seats this was not so much to the populist/Eurosceptics who have secured a similar number of seats as in the old parliament but to smaller pro-EU parties like the Greens, so pro-EU parties maintain a roughly two thirds majority. So, it’s business as usual. One risk with the EU parliamentary elections out of the way and haggling now shifting to Europe’s top bureaucratic jobs is that Germany’s Jens Weidmann could succeed Mario Draghi as ECB President. Mr Weidmann is a well-known hawk who opposed much of Mr Draghi’s stimulatory measures so if he were to take over it would likely be taken badly by investment markets – or at least until he shows he will be more pragmatic.
  • The UK EU parliamentary vote saw the Conservatives and Labour suffer a protest vote for not solving Brexit but it’s interesting to note that outside of them pro EU parties got 40% of the vote, which was more than Brexit parties did at 35% suggesting more support for Bremain than Brexit!Notwithstanding that, the likely rise of a hard core Brexiteer as Tory leader (Boris Johnson) increases the risk of a no-deal Brexit for the UK.
  • In Australia, the Victorian budget highlighted the dependence Australian states have on the property market with the property downturn causing a slump in stamp duty revenue which in turn prompted Victoria to hike other taxes at a time when growth in state public capital spending is set to slow. It highlights the possibility that states may need to ditch stamp duties and replace them with more stable revenue streams such as an increased GST or a land tax.

Major global economic events and implications

  • US consumer confidence rebounded in May and remains solid highlighting that while the trade war is impacting business confidence it’s not yet having much impact on consumers. In particular, consumer perceptions of the jobs market remain very strong which is consistent with jobless claims remaining ultra-low. Consistent with this, April data for personal spending was solid. Meanwhile, housing data remains mixed with pending home sales down in April and flat on a year ago and house price growth slowing but lower mortgage rates should help.
  • Meanwhile, US core private consumption deflator inflation remains soft at 1.6% year-on-year and Fed Vice Chair Clarida has noted that while the US economy is in a “good place” an increase in downside risks to growth and inflation could drive rate cuts. Unless the trade war is resolved soon, Fed rate cuts are looking likely.
  • Eurozone economic sentiment rose in May with gains in business and consumer confidence and credit growth accelerated in April.
  • Japanese data for April showed a continuing strong labour market (as the labour force shrinks) and a small bounce in industrial production, albeit it’s still down 1.5% yoy. Core inflation in Tokyo slipped back to just 0.8% yoy.
  • China’s composite business conditions PMI was little changed in May at a reasonable 53.3 thanks to resilient non-manufacturing conditions but a fall back in the manufacturing PMI, probably not helped by the renewed trade threat, will maintain pressure for more policy stimulus in China.

Australian economic events and implications

  • Australian data was generally soft over the last week with a further fall in building approvals, broad based declines in business investment and continuing soft credit growth. There was some good news though with rising business investment plans for 2019-20 as the mining investment bust bottoms out and turns up and as non-mining investment continues to head up. Weak demand growth in the economy will probably mean that it won’t be anywhere near as strong as the next chart implies though.

Source: ABS, AMP Capital

Source: ABS, AMP Capital

  • The minimum wage to rise 3% from July – but that’s less than last year’s 3.5% rise. So with around 20% of the workforce (those on awards) getting the minimum wage rise it actually implies a 0.1% pa fall in overall wages growth over the year ahead (ie from 2.3% year on year down to around 2.2% yoy) all else equal. Expect wages growth to remain soft!
  • The combination of slower growth in the minimum wage, falling building approvals, soft credit growth, falling March quarter investment and likely only modestly rising capex in 2019-20 leave the RBA on track to cut rates on Tuesday by 0.25% with further cuts to follow.

What to watch over the next week?

  • In the US, the Markit business conditions PMIs point to softer readings for the May manufacturing and non-manufacturing ISM indexes due Monday and Wednesday respectively, but payroll employment for May (Friday) is expected to show another solid gain of around 190,000 jobs keeping unemployment at 3.6% although with wages growth remaining benign at around 3.2% year on year.
  • The ECB at its meeting on Thursday is expected to leave monetary policy on hold but remain dovish and biased to providing more stimulus. It’s likely to announce generous arrangements for its next round of cheap bank funding and may announce that its negative interest rate on bank reserves only applies beyond required reserve levels. On the data front unemployment (Tuesday) is expected to be unchanged in April at 7.7% and core inflation for May (also Tuesday) is expected to fall back to 0.9% yoy.
  • China’s Caixin manufacturing and services conditions PMIs for May will be released on Monday and Wednesday respectively.
  • In Australia, the RBA is expected to cut the cash rate to an historic low of 1.25% at its board meeting on Tuesday. This will be the 13th rate cut in the easing cycle that started way back in November 2011. The RBA has revised down its growth and inflation forecasts sharply and now accepts that it needs lower unemployment to get inflation back to target. The problem is that recent signs point to rising unemployment. With the recent reduction in bank funding costs and nearly 90% of bank deposits on interest rates above 0.5% (and hence able to be cut if the RBA cuts) expect all the RBA’s cut to be passed on to customers. While rate cuts may not have the same bang for buck as they did a few years ago now that debt is much higher and lending standards much tighter (so don’t expect a quick return to the house price boom) they will help households that already have a mortgage (to pay down their debt faster and maintain their spending) and keep the A$ lower which in turn should help Australian businesses. They should also be seen as part of a package with fiscal stimulus on the way as indicated in the April Budget (with scope for more given the tax revenue boost from higher iron ore prices). *** At time of email distribution the cash rate has been cut to 1.25%.
  • Beyond Tuesday’s cut it is expected that the RBA will cut by another 0.25% in August and is now expected that the RBA will take the cash rate down to 0.5% by mid next year. The basic problem for the RBA is that it needs to get unemployment down below 4.5% but the slowing economy and jobs market points to a further rise in unemployment which is expected to reach 5.5% by year end. With a continuing run of softer than expected economic data, it’s doubtful that just two cuts will be enough to get unemployment below 4.5% and now expect that the RBA will have to take the cash rate below 1%, which will see an increasing debate about whether it should use quantitative easing. QE is not the base case – as things are that bad and if they were fiscal policy should really take over – but as has been the case at other major central banks the RBA is likely to prefer exhausting cash rate cuts before considering QE or anything like it and this is unlikely until it gets the cash rate down to 0.5%, which is expected to be reached by mid next year.
  • On the data front in Australia the focus is likely to be March quarter GDP data due to be released Wednesday which is expected to show continuing weak growth of 0.5% quarter on quarter or 1.8% year on year thanks to weak consumer spending and investment and falling housing construction. In other data, expect to see a further moderation in monthly house prices falls to -0.3% month on month in CoreLogic data for May (Monday) helped by a post-election bounce as property tax uncertainty was removed, a constrained 0.2% rise in April retail sales and a +0.1 percentage points contribution to March quarter GDP growth from net exports (both due Tuesday), a continuing strong trade surplus of around $5.1bn in April (Thursday) and flat housing finance for April (Friday).

Outlook for investment markets

  • Share markets are likely to see a further pull back in the short term on the back of uncertainty about trade and mixed economic data. But valuations are okay, global growth is expected to improve into the second half if the trade issue is resolved and monetary and fiscal policy have become more supportive of markets all of which should support decent gains for share markets through 2019 as a whole.
  • Low yields are likely to see low returns from bonds, but government bonds remain excellent portfolio diversifiers.
  • Unlisted commercial property and infrastructure are likely to see a further slowing in returns. This is particularly the case for Australian retail property. However, lower for even longer bond yields will help underpin unlisted asset valuations.
  • National average capital city house prices are likely to remain under pressure from tight credit, record supply and reduced foreign demand. However, the combination of imminent rate cuts, support for first home buyers via the First Home Loan Deposit Scheme, the relaxation of the 7% mortgage rate serviceability test and the removal of the threat to negative gearing and the capital gains tax discount point to house prices bottoming out by year end and higher than had been expected. We can now look for a 12% top to bottom fall in national capital city average prices, up from 15%. Next year is likely to see broadly flat prices as rising unemployment acts as a bit of a constraint.
  • Cash and bank deposits are likely to provide poor returns as the RBA cuts the official cash rate to 1% by year end.
  • The A$ is likely to fall further to around US$0.65 this year as the gap between the RBA’s cash rate and the US Fed Funds rate will likely push further into negative territory as the RBA moves to cut rates. Excessive A$ short positions and high commodity prices may help drive a short-term bounce though before the downtrend resumes and will likely prevent an A$ crash.

Source: AMP CAPITAL ‘Weekly Market Update’

AMP Capital Investors Limited and AMP Capital Funds Management Limited Disclaimer

FinSec Partners Disclaimer

Weekly Market Update – 24th May 2019

Weekly Market Update

Investment markets and key developments over the past week

  • Global share markets fell over past week amid escalating noise around the US/China trade war and increasing signs that it may be impacting business conditions. US shares fell 1.2%, Eurozone shares lost 2.1%, Japanese shares fell 0.6% and Chinese shares fell 1.5%. However, Australia’s ‘miracle’ election helped drive a 1.4% gain in the Australian share market with investors pricing out the risk of a Labor Government which resulted in a surge in bank, retail and property shares more than offsetting weakness in resources and utilities. Demand for safe havens pushed bond yields lower, with firming expectations for RBA rate cuts pushing Australian 10-year bond yields to a new record low of 1.52%. Oil and metal prices fell on concerns about global demand, but the iron ore price continued to rise.
  • The US/China trade war continued to worsen over the last week with the US ramping up bans on US companies trading with Chinese companies and commentary from the Chinese side becoming more strident in its resistance. By his recent actions increasing tariffs on China, placing bans on trading with Chinese tech companies and tightening the screws on Iran President Trump has indicated that his appetite for risk is very high and that he believes that he will get a political boost from taking a tough stance with China and Iran. But he also indicated that he is still very sensitive to the message from the share market by delaying bans on US companies selling to Huawei for 90 days after tech stocks fell in response to the bans. Views remain that just as was seen last November – when he phoned President Xi and got negotiations going – there will come a point where he will realise just how great the threat to the economy is and backtrack yet again. The problem is that this will likely require further economic weakness and share market falls before getting to that point. So, the trade conflict will likely get worse before it gets better.
  • Australian shares having surged on the election result and expectations for a rate cut being validated by the RBA are now a bit vulnerable to the worsening trade war and ongoing signs of economic weakness locally. While it’s likely to see the share market being higher by year end there is a high risk of a short-term correction in line with global shares.
  • Rate cuts are imminent in Australia, but how far will they go and will we see QE? RBA Governor Lowe has all but confirmed that rate cuts are on the way with his comment that “at our meeting in two weeks’ time, we will consider the case for lower interest rates” after observing that Australia needs lower unemployment to get inflation back to target. This follows the move to a neutral bias in February, significant downwards revisions to its growth and inflation forecasts and signs that unemployment has now bottomed and is starting to move up. All but one economist surveyed by Bloomberg now expect a cut in June up from just two only two weeks ago and two rate cuts are factored into market expectations by August. Expect 0.25% rate cuts in June and August and that all or the bulk of these will be passed on to borrowers given the recent reduction in bank funding costs and that nearly 90% of bank deposits are on interest rates above 0.5% (and hence are able to be cut if the RBA cuts). However, the problem for the RBA is that it needs to get unemployment down but the slowdown in economic growth to around 2% points to a further rise in unemployment which is expected to reach 5.5% by year end. As a result, the odds are that the RBA will have to take the cash rate below 1%, which will see an increasing debate about whether it should use quantitative easing. QE is not the base as things are not that bad and if they were fiscal policy should really take over but as has been the case at other major central banks the RBA is likely to prefer exhausting cash rate cuts before considering QE and this is unlikely until it gets the cash rate down to 0.5%.
  • Four positives for the Australian residential property market that taken together are too big to ignore – but don’t get too excited. The Federal Government’s First Home Buyer Deposit Scheme on its own was not a game changer. But when it was followed in quick succession by the demise of the threat to restrict negative gearing and raise the capital gains tax discount, APRA moving to relax the 7% mortgage rate serviceability test and the RBA essentially confirming that rate cuts are on the way it’s all too much too ignore. These developments taken together are big. Particularly the removal of Labor’s threatened property tax changes which were likely scaring off investors. They suggest that property prices will bottom earlier than they otherwise would have and we can see that later this year. As John Maynard Keynes once said, “when the facts change, I change my mind”, so expectations for the trough in property prices haven been brought forward and adjusted upwards. But given still high house-price-to-income ratios and poor affordability, still very high debt levels, tighter lending standards and rising unemployment a quick return to boom time conditions is most unlikely. After bottoming later this year, which is expected to leave capital city average prices down 12% from their 2017 high, it is likely to see broadly flat house prices for 2020.

Source: CoreLogic, AMP Capital

Source: CoreLogic, AMP Capital

Major global economic events and implications

  • US business conditions PMIs fell sharply in May. While the level is still okay the downtrend is a concern and highlights the negative impact the trade war is having with the PMI survey noting “reduced confidence linked to global trade tensions.” Underlying capital goods orders also fell in April. Meanwhile, the minutes from the last Fed meeting provided nothing new with the Fed happy to remain patient on rates. That said, the Fed’s staff see inflation staying below target and the return of the trade war since the last meeting has added to downside risks to the economy suggesting a rising risk of a rate cut.
  • The Eurozone composite business conditions PMI stabilised in May and is now higher than in the US but the German IFO business survey deteriorated with the return of the trade war likely not helping.
  • UK PM May has resigned after failing to deliver the impossible: a Brexit deal acceptable to a Parliament where there is no majority support for any deal. The best solution is a new referendum now it’s clear the UK can’t get the benefits of free trade with the EU without the costs contrary to what Brexiteers had promised. May’s departure though increases the risk of a no-deal Brexit if Boris Johnson becomes PM. Brexit remains a comedic sideshow for global markets.
  • Japanese core inflation rose in May but only to 0.6%yoy which is way below the Bank of Japan’s 2% inflation target. Meanwhile, Japan’s manufacturing conditions PMI fell back below 50 in May although it’s still up from its February low.
  • The re-election of the Modi Government is positive for economic reform and growth in India (assuming concerns about it lurching towards pro-Hindu nationalism aren’t realised).

Australian economic events and implications

  • Australian data was mostly weak with another drop in contruction activity in the March quarter spread across mining, housing and public construciton providing another weak pointer to March quarter GDP growth. What’s more skilled job vacancies fell 1.6% in April and are down around 7% from a year ago pointing to slowing jobs growth. Against this though, business conditions PMIs rose in May but they are very volatilie month to month.

What to watch over the next week?

  • In the US, expect to see ongoing gains in house prices and a rise in consumer confidence (Tuesday), a rise in pending home sales (Thursday), modest gains in personal spending for April but core private final consumption deflator inflation remaining soft at 1.6% year on year (Friday).
  • The outcome from the European parliamentary elections may see a lot of hype around Eurosceptics winning seats, but don’t read too much into it. The EU elections tend to see a higher turnout from motivated Eurosceptic voters, most Eurosceptic parties are not serious about leaving the EU and/or the Euro (the Italians and Eastern Europeans) or are irrelevant (those from the UK), the EU Parliament doesn’t have a lot of power and in any case popular support for the Euro across the Eurozone has been rising and is strong at 75%. On the data front, Eurozone economic confidence indicators for April (Tuesday) will be watched for signs of stabilisation after their falls since 2017.
  • Japanese data to be released Friday is likely to show a continuing tight labour market thanks partly to the falling workforce but industrial production data will be watched for a rebound after recent weakness.
  • Chinese business conditions PMIs for May (Friday) will be watched for any slippage after the return of the trade war.
  • In Australia, March quarter business investment (Thursday) is expected to remain weak but investment plans are likely to show a further modest improvement. Meanwhile expect to see a small bounce in building approvals (also Thursday) after a plunge in March and ongoing soft growth in private credit.

Outlook for investment markets

  • Share markets are likely to see a further pull back in the short term on the back of uncertainty about trade and mixed economic data. But valuations are okay, global growth is expected to improve into the second half and monetary and fiscal policy has become more supportive of markets, all of which should support decent gains for share markets through 2019 as a whole.
  • Low yields are likely to see low returns from bonds, but government bonds remain excellent portfolio diversifiers.
  • Unlisted commercial property and infrastructure are likely to see a further slowing in returns. This is particularly the case for Australian retail property. However, lower for even longer bond yields will help underpin unlisted asset valuations.
  • National average capital city house prices are likely to remain under pressure from tight credit, record supply, reduced foreign demand and price falls feeding on themselves. However, the combination of imminent rate cuts, support for first home buyers via the First Home Buyer Deposit Scheme, the relaxation of the 7% mortgage rate serviceability test and the removal of the threat to negative gearing and the capital gains tax discount point to house prices bottoming out earlier and higher than had been expected. Now it’s likely for a 12% top to bottom fall in national capital city average prices, compared to 15% previously.
  • Cash and bank deposits are likely to provide poor returns as the RBA cuts the official cash rate to 1% by year end.
  • The A$ is likely to fall further to around US$0.65 this year as the gap between the RBA’s cash rate and the US Fed Funds rate will likely push further into negative territory as the RBA moves to cut rates. Excessive A$ short positions and high commodity prices may help drive a short-term bounce though before the downtrend resumes and will likely prevent an A$ crash.

Source: AMP CAPITAL ‘Weekly Market Update’

AMP Capital Investors Limited and AMP Capital Funds Management Limited Disclaimer

FinSec Partners Disclaimer

Weekly Market Update – 17th May 2019

Weekly Market Update

Investment markets and key developments over the past week

  • Share markets fell earlier in the past week as the trade war continued to escalate, before rebounding helped by better economic and earnings news and hopes of a trade deal. This left share markets mixed with US and Chinese shares down slightly, but Eurozone, Japanese and Australian shares up. Australian shares saw strong gains in resources stocks helped by rising iron ore and oil prices and in property, health and consumer shares with ongoing talk of rate cuts also helping and this offset a sharp fall in the banks. Bond yields fell further on weak inflation and safe haven demand. Oil and iron ore prices rose but copper prices fell. The $A fell below $US0.69.
  • The US trade war continued to rattle investors over the last week, but the news wasn’t all bad.Yes, China announced retaliation to US tariff hikes, but it was small compared to what the US did. Yes, Trump continued to make threatening noises to China and moved to ban US companies from doing business with Huawei, but he also indicated that he will meet President Xi at the G20 summit in Tokyo next month which is shaping up as the most likely offramp from the current escalation of trade tensions. Trump also looks likely to delay a decision on auto tariffs (that was due by May 18) to give the EU and Japan six months to agree to limitations on their auto exports to the US which is consistent with the view that he doesn’t want to fight a trade war on three fronts. The trade issue could still get worse before it gets better (eg, the US is still preparing to tax all remaining Chinese imports at 25%), but views remain that a deal will ultimately be reached to resolve the issue given the economic (and in Trump’s case political) damage that would be caused if a deal is not reached.
  • Federal financial support for first home buyers (FHBs) in Australia is now on the way but don’t get too excited by the First Home Loan Deposit (underwriting) Scheme. The scheme will be of some help in enabling FHBs to get in earlier and saving them mortgage insurance which can cost up to $10,000. But being capped at 10,000 FHBs a year its pretty small at around 10% of FHB loans in the last year, the borrowers will be taking on even bigger mortgages (when regulators have been trying to reduce the size of mortgages), which will come with a higher risk of negative equity, borrowers will still have to meet the tougher credit standards of recent times and it won’t kick in until next year. So, it’s probably not a game changer at this stage. That said it could morph into a far more attractive home buyer grant at some point (which is something we have seen in most major housing downturns in recent times) and will add to confidence along with RBA rate cuts, improving affordability and a slowing in new supply next year to help the property market bottom out short of the worst case falls some are putting out there.
  • The week ahead in Australia will no doubt be dominated by the outcome of the election. If the Coalition wins its business as usual with their strategy laid out in the April budget. If Labor wins (as opinion polls and betting agencies are pointing to, albeit Labor’s lead has narrowed to around 51/49) then on their current policies we will see a similar fiscal impact on the economy for the next few years as to what would have occurred under the Coalition (as their budget surplus projections are virtually identical for the next three years) but we will see a more interventionist approach in the economy – with various tax hikes, increased government spending, more aggressive action to reduce carbon emissions, increased regulation and some labour market re-regulation – which may adversely affect some share market sectors and the residential property market. If there is no clear result initially, as was the case in the 2010 election after which it took 17 days of negotiation to form a Government, it may cause a bit of short-term uncertainty, but investment markets would be unlikely to see a major impact until a government is formed. (The Australian share market fell 2.5% in the first two trading days after the 2010 election, but within a week was back to being unchanged and was 3% higher by the time the government was confirmed. It was similar for the $A which initially fell 1%, but within a week was back to being unchanged and was 3% higher by the time it was resolved.)
  • Vale Bob Hawke. The Hawke/Keating reforms of the 1980s & 1990s modernised the Australian economy and are a big part of the reason we have gone nearly 28 years without a recession.

Major global economic events and implications

  • US economic data was mostly good with weak readings for April retail sales (albeit after a very strong March) and industrial production but better manufacturing conditions in the New York and Philadelphia regions, higher small business confidence and stronger home builder conditions, a bounce back in housing starts and a fall in jobless claims. Weak import prices are adding to the downwards pressure on inflation though, which combined with the resumption of the trade war is increasing the risk that the next move by the Fed will be a cut.
  • Japanese data was soft with a sharp fall in machine tool orders and a downtrend in the Economy Watchers confidence survey. Coming on the back of a resumption of falling wages the pressure is on the Government to postpone October’s scheduled VAT rate hike and on the BoJ to do more.
  • Chinese data for industrial production, retail sales and fixed investment all slowed again in April.While this may be partly due to distortions caused by a VAT rate cut and Lunar New Year holiday timing and unemployment actually fell, coming on top of the resumption of the trade war it will likely result in a further ramping up of policy stimulus.

Australian economic events and implications

  • Australian data was soft over the last week. Housing finance resumed its downswing in March with investor finance (ex refinancing) back around 2009 and 2011 levels. Consumer and business confidence are running around long run average levels but the NAB’s business conditions index fell back to its December low and employment intentions fell sharply pointing to slower jobs growth ahead. Employment was solid in April but the full time part time mix was poor, and more significantly jobs growth is no longer keeping up with rapid labour force growth so unemployment and underemployment are both on the rise again. Finally, wages growth remained stuck at just 2.3% year on year in the March quarter. Sure its above inflation and up from its lows. But its still very weak and with unemployment and underemployment remaining very high and starting to rise again as the housing downturn hits employment its hard to see much fundamental acceleration in wages growth from here (even if the Government starts pushing up the minimum wage at a faster rate). The bottom line remains that to get wages growth and inflation up we need much lower unemployment and underemployment but to get that we will need even lower interest rates and more fiscal stimulus. The contrast between the US and Australian levels of labour market underutilisation remains stark and even with the much tighter labour market in the US wages growth has just managed to get up to 3%. With the election out of the way, expect the RBA to cut the cash rate to 1.25% in June and then to 1% in August.

Source: Bloomberg, ABS, AMP Capital

Source: Bloomberg, ABS, AMP Capital

What to watch over the next week?

  • In the US, the minutes from the Fed’s last meeting are likely to confirm its neutral bias on interest rates. The base case remains that the Fed’s pause will continue for another six months at least but the return of the US/China trade war and sub target inflation has increased the risk that the next move will be a cut rather than a hike. On the data front, expect a rebound in existing home sales (Tuesday) but a fall in new home sales (Thursday), business conditions PMIs for May (Thursday) to remain around the 53 level and underlying durable goods orders (Friday) to show modest growth.
  • European parliamentary elections on Thursday will no doubt see a lot of hype around Eurosceptics winning seats, but don’t read too much into it. The EU elections tend to see a higher turnout from motivated Eurosceptic voters, Eurosceptic/nationalist parties will still only get around a quarter of the seats, most of them are not serious about leaving the EU and/or the Euro (the Italians and Eastern Europeans) or are irrelevant (those from the UK), the EU Parliament doesn’t have a lot of power and in any case popular support for the Euro across the Eurozone has been rising and is strong at 75%. Meanwhile Eurozone business conditions PMIs (also due Thursday) will be watched for further signs of stabilisation.
  • Japanese March quarter GDP growth (Monday) is expected to show a small 0.1% dip continuing the up down pattern of the last year. Annual growth will be just 0.3% year on year.
  • In Australia, the initial focus will be on the outcome of the Federal election. Beyond that the focus will be back to monetary policy with the release of the minutes from the last RBA board meeting and a speech by RBA Governor Lowe on Tuesday, both of which are expected to signal some sort of shift towards an easing bias on interest rates ahead of rate cuts in the months ahead. On the data front, March quarter construction data will likely remain weak with another fall of around 1% quarter on quarter. Data for skilled vacancies and the CBA’s business conditions PMIs will also be released.

Outlook for investment markets

  • Share markets – globally & in Australia – have run hard and fast from their December lows and are vulnerable to a further short-term pullback. Geopolitical uncertainty around trade, North Korea, Iran and still mixed global economic data could be the drivers. But valuations are okay, global growth is expected to improve into the second half and monetary and fiscal policy has become more supportive of markets all of which should support decent gains for share markets through 2019 as a whole.
  • Low yields are likely to see low returns from bonds, but government bonds remain excellent portfolio diversifiers.
  • Unlisted commercial property and infrastructure are likely to see a further slowing in returns. This is particularly the case for Australian retail property. However, lower for even longer bond yields will help underpin unlisted asset valuations.
  • Our base case is for national capital city house prices to fall another 5% or so into 2020 on the back of tight credit, rising supply, reduced foreign demand, price falls feeding on themselves and uncertainty around the impact of tax changes under a Labor Government. An earlier rate cut in May could bring forward the bottom in house prices as in the last two cycles they bottomed four months or so after the first rate cut.
  • Cash and bank deposits are likely to provide poor returns as the RBA cuts the official cash rate to 1% by year end.
  • The $A is likely to fall further to around $US0.65 as the gap between the RBA’s cash rate and the US Fed Funds rate will likely push further into negative territory as the RBA moves to cut rates. Excessive $A short positions and high commodity prices will likely prevent an $A crash though.

Source: AMP CAPITAL ‘Weekly Market Update’

AMP Capital Investors Limited and AMP Capital Funds Management Limited Disclaimer

FinSec Partners Disclaimer

Weekly Market Update – 10th May 2019

Weekly Market Update

Investment markets and key developments over the past week

  • Share markets fell over the last week as US/China trade tensions returned with a vengeance and the US ramped up tariffs again, but losses were limited by hopes for a resolution. Thanks to a late rally on Friday, the decline in US shares for the week was limited to 2.2%, but Eurozone shares lost 3.6%, Japanese shares fell 4.1% and Chinese shares lost 4.7%. Australian shares were relatively resilient though falling only 0.4%, helped by gains in utilities, property stocks, telecommunications and resources stocks. The return to ‘risk off’ saw bond yields decline but commodity prices were mixed with oil and metals down but iron up on ongoing supply disruptions. The A$ pushed just below US$0.70.
  • Trade war back on again (for now). After appearing to make good progress on trade talks this year, President Trump hit the tantrum button and tweeted that the tariffs on US$200bn of imports from China will rise from 10% to 25% (delayed from January) and that remaining imports from China of around US$325bn will be taxed at 25% too. The first of these has now happened with China moving to retaliate and the second may take several months to put in place. President Trump’s move was supposedly in response to China back tracking on much of what had already been agreed – It is likely that both sides may have become emboldened by better economic data and share markets this year and so have decided to take risks again. Rising geopolitical tensions around North Korea and Iran are probably not helping the issue either.
  • Taxing all US imports from China at 25% would be a big deal compared to last year’s tariff hikes in that it will push the average tariff on all US imports from around 3% to around 7.5% and see the impact shift to largely consumer goods as opposed to industrial and intermediate goods in the first tariff rounds. This could add around 0.2% to core inflation and detract up to 0.75% from US GDP. Given the flow on to confidence and global growth, hopefully the latest tariff hikes will be short-lived and the extra tranche of tariffs will be avoided. Hopefully this is the case and a deal is reached once both sides refocus on the economic costs of slower growth, higher consumer prices and potentially rising unemployment, of which falling share markets have provided a reminder this week. This is particularly relevant for President Trump given his desire to get re-elected next year as rising prices at ‘Walmart’ and rising unemployment will drive a backlash.While this week’s round of trade talks in Washington failed to reach a breakthrough both President Trump and Treasury Secretary Mnuchin described them as “constructive” and Chinese Vice Premier Liu He said the talks will continue. Ongoing investor optimism of a deal to resolve the issue, along with hopes for more Chinese economic stimulus and last year’s experience that saw little real economic impact from tariff hikes probably explains the relatively mild share market reaction so far to the resumption of the trade war. While views remain that a deal will be reached, the risks have now ramped up again so investors need to allow for a trade war that could get worse before it gets better risking further short-term weakness in share markets at a time when they are already vulnerable after strong gains this year. In fact, sharper share market falls may be needed to remind the US and China of the need for a deal.
  • RBA remains on hold, but looks to be getting closer to a cut with an implicit easing bias. It was thought recent disappointments on growth and inflation would tip the RBA over the edge to a cut in May, but it was always a close call. However, it would be wrong to interpret this month’s inaction as a sign that rate cuts are not on the way.
  • Firstly, the RBA’s desire to avoid the politicisation of interest rates and the political spin that would have been put on a rate cut probably played a big role in the decision to hold in May (not that they would admit to that!).
  • Secondly, the RBA’s Statement on Monetary Policy has yet again revised down its growth forecasts to now “around 2.75%” and its underlying inflation forecast to 1.75% for this year. Only six months ago growth was forecast to “average around 3.5%” and underlying inflation for this year was forecast to be 2.25%!
  • Thirdly, the RBA has effectively lowered its hurdle for a rate cut to be the absence of a further decline in unemployment, from being a rise in unemployment. While rather convoluted the comment in the SOMP that “the ongoing subdued rate of inflation suggests that a lower rate of unemployment is achievable while also having inflation consistent with the target” basically means that NAIRU (or non-accelerating inflation rate of unemployment) is likely lower than the RBA has been assuming and that the level of unemployment consistent with the inflation target is below the current level of unemployment of 5%. Therefore unemployment needs to fall further to get inflation back to target.
  • Fourthly, even with the technical assumption that the cash rate will move in line with market pricing for two rate cuts, the RBA only forecasts that inflation will get back to the bottom of the 2-3% target range in 2020-21 and unemployment tracks sideways at 5% out to the end of next year, implying just to achieve this rates need to be cut by 0.5% and that to get unemployment lower in the next 18 months and inflation confidently back into the target range rates may need to fall below 1%.
  • Fifthly, the RBA’s observation that short term funding costs for the banks have come down and yet average mortgage rates haven’t suggests that its sees scope for the banks to cut mortgage rates suggesting that it expects that all or a significant portion of rate cuts will be passed on.
  • Finally, the RBA is on record in the minutes to its last meeting as saying that lower rates could still help the economy.
  • Given expectations for unemployment to rise to 5.5% by year end and underlying inflation to remain lower for longer, views remain that the RBA will cut the cash rate twice this year to 1% by year end, with the risk being that they may have to do more. The first move could come as early as next month.
  • The basic problem for the RBA remains that inflation has been undershooting its forecasts and the 2-3% target for around five years now. The longer this persists the more it will lose credibility, seeing low inflation expectations become entrenched and risking a slide into deflation in the next economic downturn.

Source: RBA, AMP Capital

Source: RBA, AMP Capital

  • Meanwhile across the Tasman the RBNZ looks to be taking a more forward-looking approach to monetary policy, having cut its official cash rate in the last week after revising down its inflation forecasts and in anticipation of slower jobs growth.
  • It’s now only one week to go to the Australia Federal election. The last week of campaigning has simply confirmed the significant policy differences between the major parties with Labor proposing a more interventionist approach to the economy compared to the Coalition – in terms of tax, spending, climate policy, regulation and industrial relations. The polling gap narrowed through March and April but still favours Labor.

Source: Wikipedia based on major polls, AMP Capital

Source: Wikipedia based on major polls, AMP Capital

Major global economic events and implications

  • US job openings, hiring and quits remained high in March and the trade deficit deteriorated a bit but consumer and producer price inflation remained benign. US March quarter earnings reports are now 90% done. 76% have beaten on earnings by an average 6% and 55% have beaten on sales. Earnings growth started the reporting season with expectations for a 2% fall on a year ago but looks like ending up around +3%.
  • Whatever happened to Brexit? Well nothing. They still can’t agree and so the UK will be participating in EU parliamentary elections on 23 May which will likely show strong support for pro remain and pro Brexit parties.
  • Chinese data was a mixed bag with stronger growth in imports suggesting strong domestic demand, but weaker exports and another pull back in total credit. However, abstracting from monthly volatility, momentum in exports and credit growth is still trending up after bottoming late last year or early this year. Meanwhile inflation rose to 2.5% year-on-year in March but this was driven by higher pork prices with core inflation falling to 1.7% year-on-year suggesting inflation is not posing a problem for policy stimulus. Speaking of which, policy stimulus continued with the PBOC cutting reserve requirements for targeted small banks.

Australian economic events and implications

  • Australian data was on the soft side domestically but there was some good news regarding trade. Retail sales came in better than expected for March after strength in February, but it was due to higher food prices, with March quarter retail sales going backwards pointing to another weak quarter for consumer spending. Meanwhile, ANZ job ads slipped again in April and are now down 5.6% year-on-year and the Melbourne Institute’s Inflation Gauge for April slipped to 1.8% year-on-year with the underlying measure falling to 1.3% year-on-year. However, in good news for the economy the trade surplus remained around record levels, but the improvement in the March quarter looks to have been due to gains in export prices with net exports contribution to GDP growth looking basically flat. But higher export prices will add to national income via the terms of trade which in turn will likely drive the budget into surplus for this year.

What to watch over the next week?

  • Apart from the US/China trade issue, President Trump is also due to make a decision regarding auto tariffs by May 18 but this may be delayed given ongoing talks with the EU and Japan and auto tariffs face wide bi-partisan opposition in Congress. On the data front, consumer spending is likely to be the focus in the US in the week ahead with retail sales data due Wednesday likely to show a modest rise in April after March’s surge. In other data expect continuing strength in small business optimism (Tuesday), a small rise in industrial production and a further improvement in home buyer conditions (both Wednesday) and a solid bounce in housing starts (Thursday). Manufacturing conditions surveys for the New York and Philadelphia regions will also be released.
  • Chinese activity data for April to be released Wednesday will be watched for further improvement after the pick up seen in March. Industrial production is likely to slow a bit but retail sales and fixed asset investment are expected to hold on to recent gains if not improve slightly further.
  • In Australia, apart from the focus on Saturday’s election, jobs data to be released Thursday will attract even more than usual attention given the importance the RBA has attached to a further improvement in the labour market as a key to getting inflation up and heading off rate cuts. Expect to see a 12,000 gain in employment but unemployment rising to 5.1%. March quarter wages data to be released Wednesday will also attract a lot of interest but is expected to have remained subdued at 0.5% quarter-on-quarter or 2.3% year-on-year. Meanwhile, March housing finance (Monday) is expected to show a 0.5% fall after February’s bounce, the NAB’s business conditions survey will be released Tuesday and consumer confidence will be released Wednesday.

Outlook for investment markets

  • Share markets – globally and in Australia – have run hard and fast from their December lows and are vulnerable to a further short-term pullback. Geopolitical uncertainty around trade, North Korea, Iran and still mixed global economic data could be the drivers. But valuations are okay, global growth is expected to improve into the second half and monetary and fiscal policy has become more supportive of markets all of which should support decent gains for share markets through 2019 as a whole.
  • Low yields are likely to see low returns from bonds, but government bonds remain excellent portfolio diversifiers.
  • Unlisted commercial property and infrastructure are likely to see a slowing in returns. This is particularly the case for Australian retail property. However, lower for even longer bond yields will help underpin unlisted asset valuations.
  • Our base case is for national capital city house prices to fall another 5% or so into 2020 on the back of tight credit, rising supply, reduced foreign demand, price falls feeding on themselves and uncertainty around the impact of tax changes under a Labor Government. An earlier rate cut could bring forward the bottom in house prices as in the last two cycles they bottomed four months or so after the first rate cut.
  • Cash and bank deposits are likely to provide poor returns as the RBA cuts the official cash rate to 1% by year end.
  • The A$ is likely to fall further into the US$0.60s as the gap between the RBA’s cash rate and the US Fed Funds rate will likely push further into negative territory as the RBA moves to cut rates. Excessive A$ short positions and high commodity prices will likely prevent an A$ crash though.

Source: AMP CAPITAL ‘Weekly Market Update’

AMP Capital Investors Limited and AMP Capital Funds Management Limited Disclaimer

FinSec Partners Disclaimer

Weekly Market Update – 3rd May 2019

Weekly Market Update

Investment markets and key developments over the past week

  • Share markets fell earlier in the past week with the US Federal Reserve (Fed) indicating no inclination to cut rates, a bit of wariness around US/China trade talks and as a fall back in oil prices weighed on energy shares but US shares were given a boost by another Goldilocks jobs report on Friday. This resulted in a mixed week for shares with US shares up 0.2% for the week, Eurozone shares down 0.2%, Chinese shares up 0.6% and Australian shares down 0.8% with energy shares being the biggest drag. Bond yields generally rose. While the iron ore price rose, oil prices were hit by rising US inventories and metal prices also fell. The A$ fell back to around US$0.70.
  • Geopolitical risk is back again with President Trump threatening to resume the escalation of tariffs on China and reports that North Korea fired a short-range missile. Trump’s threat to increase the tariff on US$200 billion of imports from China from 10% to 25% (delayed from January) and look to tax remaining imports from China (which will take time) suggest that the latest round of trade talks did not go as well as planned and looks aimed at putting pressure on China to resolve the talks. Ultimately, views remain that there will be a resolution given the economic damage not doing so would cause particularly ahead of Trump’s re-election bid next year – US presidents don’t get re-elected when unemployment is rising. But the latest threat adds to the risk of market weakness in the short term.
  • North Korea’s reported missile test may add to consternation particularly in Asian markets as the issue has been on the backburner since mid-last year and it could become a bigger issue if North Korean missile and nuclear tests ramp back up again. But it’s likely all about putting pressure on the US and Kim Jong Un is unlikely to push things so far that it threatens his own existence.
  • The Fed provided no surprises so far but it disappointed markets who were hoping for talk of a rate cut. Basically, the Fed remains confident on growth and sees low inflation arguing against a rate hike but also sees the recent fall inflation as “transitory” and the economy as mostly strong which argues against a rate cut. The latest Goldilocks jobs report showing strong jobs growth and ultra-low unemployment but benign wages growth will likely reinforce the Fed’s patience on rates. So, it remains on hold regarding rates and is likely to remain so for the next six months. And it’s still on track to end quantitative tightening this year. Short term noise aside, the Fed is providing a favourable back drop for investment markets.
  • Trump and the Democrats at last agree on infrastructure with a US$2 trillion plan but don’t get too excited just yet. First, it looks like it will be spread over 25 years, so sounds bigger than it really is. And funding is likely to be a big sticking point with Democrats likely to focus on tax hikes (and some leaning towards letting the deficit blow out in line with Modern Monetary Theory) funding big government programs and the Republicans in the Senate wanting incentives for private infrastructure spending.
  • In Australia, it’s now only two weeks to the Federal election. The last few weeks of policy announcements have been consistent with a Labor Government taking a more interventionist approach compared to the Coalition – in terms of tax, spending, climate policy, regulation and industrial relations (including the use of wage subsidies). The polling gap still favours Labor albeit the gap has narrowed.

Source: Wikipedia based on major polls, AMP Capital

Source: Wikipedia based on major polls, AMP Capital

Major global economic events and implications

  • US data was mostly strong. The ISM business conditions indexes fell in April (although they remain at solid levels on average) and construction spending fell in March. But against this payroll employment rose a much stronger than expected 263,000 in April, unemployment fell to just 3.6% which is the lowest since 1969 and strong gains were seen in consumer confidence, personal spending and pending home sales. Meanwhile, wages growth remained benign at 3.2% year-on-year in April and employment costs rose a modest 2.8% year-on-year in the March quarter. With productivity growth surging to 2.4% year-on-year, growth in unit labour costs is weak, all of which is consistent with continuing benign inflation. Rising productivity growth is also positive for profit margins and suggests that potential growth in the US may be rising again.

Source: Bloomberg, AMP Capital

Source: Bloomberg, AMP Capital

  • Approximately 78% of US S&P 500 companies have now reported March quarter earnings results and while corporates are cautious results overall remain far better than expected. Around 76% have beaten on earnings with an average beat of 6% and 57% have beaten on sales. Earnings growth started the reporting season with expectations for a 2% fall on a year ago but has now risen to around 2% and this is likely to mark the low point for this year. Median company earnings are up 5%.

Source: Bloomberg, AMP Capital

Source: Bloomberg, AMP Capital

  • Eurozone core inflation rose more than expected to 1.2% year-on-year in April from 0.8%. It’s still way below target, it’s likely to have been pushed up by the timing of Easter and Eurozone inflation has had false starts before. But coming after stronger than expected March quarter GDP growth suggesting growth bottomed in the September quarter and still falling unemployment in March it takes a bit of pressure off the ECB.
  • China saw some mixed PMIs for April, but they are up from recent lows and consistent with other data suggesting Chinese growth has likely bottomed but is not off to the races again.

Australian economic events and implications

  • Australian home prices continued to slide in April with the pace of decline slowing but more cities succumbing to falls. The slowing in the pace of home price falls, along with a bounce in housing finance, a pick-up in auction clearance rates and a stabilisation in new home sales according to the HIA are positive signs, suggesting we may be getting close to the bottom. At the very least we are not seeing any of the panic/forced selling that some had feared would occur. However, views remain that there is still more to go yet (with national capital city prices having seen 10% of an expected 15% top to bottom fall) as the negatives around tight credit and surging supply remain significant. What’s more the nearly five-year decline in Perth and Darwin property prices has seen several phases where price declines slowed then accelerated again, the bounce in clearance rates looks seasonal and they remain weak and less favourable negative gearing and capital gains tax arrangements if there is an ALP victory could see renewed pressure on property prices next year. An earlier rate cut in May could bring forward the bottom in house prices as in the last two cycles they bottomed around four months after the first cut, although it is worth noting that stronger supply conditions, tighter lending standards, higher debt to income ratios and depressed investor confidence will likely constrain the response interest rate cuts this time around.
  • Meanwhile, building approvals fell back sharply in March and credit growth remained soft with lending growth to housing investors falling to a record low. Business conditions PMIs mostly rose in April, but they remain soft and well down from last year’s highs and employment components have fallen.

What to watch over the next week?

  • In the US, expect core CPI inflation for April to be released Friday to rise slightly to 2.1% year on year, confirming that US inflation remains benign keeping the Fed on hold. In other data releases expect March job openings (Tuesday) to rebound and the March trade deficit (Thursday) to deteriorate slightly. The flow of US earnings reports will continue with nearly 60 S&P 500 companies due to report and Chinese negotiators are scheduled to be in the US for another round of trade talks.
  • Chinese trade data for April (Wednesday) is expected to show continued strength in exports but will be watched for a recovery in import growth. Inflation data (Thursday) is expected to show that underlying inflation remains benign.
  • In Australia, it is likely to see the RBA cutting the official cash rate by 0.25% on Tuesday taking it to 1.25% which will be a new record low and the first move since August 2016. However, while it’s likely that rates will be cut to 1% by year end, it’s a very close call as to whether the Bank goes Tuesday or waits till after the election. The case to wait is that it will avoid the politicisation of interest rates in the election campaign, the RBA can wait to see who wins the election and get a better handle on what sort of fiscal stimulus will be delivered, we are yet to see a rising trend in unemployment and the RBA has yet to move to a clear easing bias. The case to go now though is that inflation has come in lower than expected and is going the wrong way, the RBA is likely to further revise down its inflation forecasts in the May Statement on Monetary Policy so waiting risks further damaging the credibility of the RBA’s inflation target, the fiscal boost is still several months away, waiting till unemployment rises may be too late, not cutting on Tuesday could see the A$ bounce which would be a defacto monetary tightening and the RBA hasn’t always preceded moves by a change in its bias. The case to cut now dominates so it is likely to see the Tuesday for the first cut, but it’s a close call so it would hardly surprise if they decide to wait another month or so. If the RBA doesn’t cut on Tuesday, it’s likely they will move to some sort of easing bias. The RBA’s Statement on Monetary Policy to be released Friday will be watched for further clues on the interest rate outlook, but a further reduction in the RBA’s forecasts for underlying inflation to 1.75% for year end from 2% currently will be consistent with lower rates.
  • Meanwhile, on the data front in Australia, expect ANZ job ads (Monday) to show a rebound although this is likely to be due to a distortion caused by the close proximity of the Easter and Anzac Day holidays this year. On Tuesday, the trade surplus for March will likely remain strong at around $4.6bn and March retail sales will likely slow to a 0.2% gain after their February bounce leaving real retail sales up 0.4% for the March quarter.

Outlook for investment markets

  • Share markets globally and in Australia – have run hard and fast from their December lows and are vulnerable to a short-term pullback. But valuations are okay, global growth is expected to improve into the second half of the year, monetary and fiscal policy has become more supportive of markets and the trade war threat is receding, all of which should support decent gains for share markets through 2019 as a whole.
  • Low yields are likely to see low returns from bonds, but government bonds continue to provide an excellent portfolio diversifier.
  • Unlisted commercial property and infrastructure are likely to see a slowing in returns over the year ahead. This is particularly the case for Australian retail property. However, lower for even longer bond yields will help underpin unlisted asset valuations.
  • Our base case is for national capital city house prices to fall another 5% or so into 2020 on the back of tight credit, rising supply, reduced foreign demand, price falls feeding on themselves and uncertainty around the impact of tax changes under a Labor Government. An earlier rate cut in May could bring forward the bottom in house prices as in the last two cycles they bottomed four months or so after the first rate cut.
  • Cash and bank deposits are likely to provide poor returns as the RBA cuts the official cash rate to 1% by year end.
  • The A$ is likely to fall further into the US$0.60s as the gap between the RBA’s cash rate and the US Fed Funds rate will likely push further into negative territory as the RBA moves to cut rates. Excessive A$ short positions and high commodity prices will likely prevent an A$ crash though.

Source: AMP CAPITAL ‘Weekly Market Update’

AMP Capital Investors Limited and AMP Capital Funds Management Limited Disclaimer

FinSec Partners Disclaimer

Weekly Market Update – 26th April 2019

Weekly Market Update

Investment markets and key developments over the past week

  • Share markets were mixed over the last week. US shares rose 1.2% to a new record high, helped by good earnings news and rising energy shares on the back of high oil prices. Japanese shares rose 0.3%. Following the US lead, Australian shares rose 1.8% to be back above last year’s high helped by banks, energy shares and talk of an imminent RBA rate cut. But Eurozone shares fell 0.2% and Chinese shares fell 5.6% with talk of less stimulus weighing on Chinese shares. Bond yields fell. Commodities were mixed with gold and iron ore up but metals and oil down. The A$ fell back to around US$0.70 in the face of a break higher in the US$ and more RBA rate cut talk.
  • Share markets back to around last year highs but is it sustainable? Having rebounded very sharply from their December lows, share markets are vulnerable to a decent pullback or correction. But putting short terms risks aside, they are still likely to end the year higher. Put simply, the rebound in shares reflects a reversal of last year’s negatives with more dovish central banks led by the Fed, lower inflation allowing lower bond yields, stabilisation and in some case improvement in global growth indicators which should underpin reasonable profit growth and the risks around a trade war receding.
  • Another curve ball from President Trump this time on oil. Six months ago the decision by Trump to exempt China, India, Japan and a few other countries from US sanctions for buying around 1.4 million barrels a day of Iranian oil helped drive global oil prices down and it was thought the exemptions would be renewed. But just to confuse everyone they won’t be, leading to concerns about a new surge in oil prices as it removes Iranian oil from the global market at a time of supply disruptions in Libya and Venezuela. WTI crude at US$63 a barrel is still well below last year’s high of US$76 (as are Australian average petrol prices of around $1.50 a litre versus last year’s high around $1.60) and commitments by Saudi Arabia and the UAE to make up for lost supply may still keep prices below last year’s highs. But if it doesn’t – and prices keep rising in response to supply shortfalls or tensions around Iran – expect Trump to get nervous (as higher gasoline prices don’t please his base) and do something like bring back the sanction waivers.
  • Low March quarter inflation highlights the case for an imminent rate cut in Australia. Sure, a 9% decline in petrol prices drove the flat headline increase in quarterly inflation and petrol prices have since bounced back with the world oil price. But every measure of underlying inflation was weak, running between 1.2% year-on-year to 1.4% year-on-year. Businesses are still finding it hard to lift prices in the face of ongoing spare capacity, intense competition and weak demand. Yet again the RBA’s inflation forecasts are looking way too optimistic (see the next chart) and will likely be downgraded again in next month’s Statement on Monetary Policy. The longer inflation undershoots the 2-3% target, the greater the risk that the target will lose credibility. This in turn will see low inflation expectations become more entrenched, making it in turn even harder to get inflation back to target and leave Australia vulnerable to slipping into deflation during the next economic downturn. Lowering the 2-3% target would be a huge mistake and would see inflation targeting lose all credibility and only lock in low inflation (and the risk of deflation) for longer.

Source: RBA, Bloomberg, AMP Capital

Source: RBA, Bloomberg, AMP Capital

  • While the RBA would prefer to wait till after the election and see a rise in unemployment before moving on rates, March quarter’s much weaker-than-expected underlying inflation data will likely have shocked the RBA into thinking that waiting too much longer will be too risky. As a result, while it’s a close call, it’s now likely to see the RBA undertaking the first of the two rate cuts expected this year in May. Out of interest, the RBA has changed interest rates twice in election campaigns in recent times raising rates in the 2007 election campaign and cutting them in the 2013 election campaign. So if the RBA feels the need to move it will, even in election campaigns.

Major global economic events and implications

  • US data was mostly strong. Existing home sales fell in March, but new home sales rose, house prices continue to rise and underlying durable goods orders rose solidly. March quarter GDP rose at a much stronger than expected 3.2% annualised rate with contributions from trade (+1 percentage point) and inventory (+0.7 percentage points) offsetting slower growth in consumer spending and investment. Inventory will likely be a drag going forward, but expect consumption and investment to pick up again. Jobless claims bounced from their lowest since 1969 but this looks Easter holiday-related.
  • Nearly 50% of US S&P 500 companies have reported March quarter earnings results and so far, so good with 78% beating on earnings and 53% on revenue. Earnings growth started the reporting season with expectations for a 2% fall on a year ago, but have now risen to +0.5% and are likely to end up around 2.5% and this is likely to mark the low point for this year.

 Source: Bloomberg, AMP Capital

Source: Bloomberg, AMP Capital

  • German and French business conditions indicators were down slightly and flat respectively, but look to be stabilising.
  • The Japanese jobs market remained tight in March, helped by a falling labour force but industrial production remains very weak. Meanwhile the Bank of Japan made no changes to its ultra easy monetary policy as expected, but it committed to keeping rates low for another year at least. Given it’s way off meeting its 2% inflation target, further easing is likely.
  • China pulling back from further policy stimulus, but this is because it has stabilised growth. This was the key message from recent policy meetings in China, including the March quarter Politburo Meeting with policy makers expressing more optimism about the Chinese economy in response to the recent improvement in growth indicators and therefore shifting back from stimulus to fine tuning. This is appropriate and signals that China does not want to over-stimulate Chinese growth.

Australian economic events and implications

  • Along with weak consumer price inflation, producer price inflation for the March quarter was also soft, import prices fell and skilled vacancies fell again. On the positive side, export prices continued to surge in the March quarter (helped by the higher iron ore price) pushing up the terms of trade. The flow-on of this to profits and tax revenue in Canberra, along with lower welfare payments, saw a further improvement in the Federal budget, making a surplus this financial year quite likely. Which in turn may mean scope for more fiscal stimulus.

What to watch over the next week?

  • In the US, it will be a busy week with the Fed meeting on Wednesday and April jobs data due Friday. Expect the Fed to remain patiently on hold as inflation remains below target and it waits for clearer evidence that the headwinds to growth are receding. April jobs data is likely to have remained solid with a 180,000 gain in payrolls, unemployment remaining at 3.8% and wages growth picking up slightly to 3.3% year-on-year. In other data, expect to see a solid rise in March personal spending but core private consumption deflator inflation (both due Monday) falling to 1.7% year-on-year, March quarter employment costs up around 3.1% year-on-year and a rise in April consumer confidence (both Tuesday), the manufacturing ISM for April (Wednesday) remaining strong around 55 and the non-manufacturing ISM (Friday) falling slightly to a still strong 55. The flow of US March quarter earnings reports will continue.
  • In the Eurozone, the focus is likely to be on March quarter GDP growth (Tuesday) which is likely to have remained subdued at 0.2% quarter-on-quarter with annual growth slowing to 0.9% year-on-year. Meanwhile economic confidence for April (Monday) will be watched for signs of stabilisation, March unemployment (Tuesday) is likely to be flat at 7.8% and core inflation (Friday) is likely to stay weak at 1% year-on-year in April.
  • The outcome of Spain’s general election on Sunday (28th April) is unlikely to have implications outside Spain and poses no threat to the eurozone, with support for the euro running high and populist parties not seeking to leave it.
  • Chinese business conditions PMIs to be released Tuesday and Thursday are likely to have held on to recent gains consistent with an improvement in Chinese economic growth.
  • Australian data is expected to show continuing modest growth in credit (Tuesday), a further fall in CoreLogic home price data for April (Wednesday) and a sharp 13% fall in residential building approvals for March after a 19% bounce in February.

Outlook for investment markets

  • Share markets globally and in Australia – have run hard and fast from their December lows and are vulnerable to a short-term pullback. But valuations are okay, global growth is expected to improve into the second half of the year, monetary and fiscal policy has become more supportive of markets and the trade war threat is receding all of which should support decent gains for share markets through 2019 as a whole.
  • Low yields are likely to see low returns from bonds, but government bonds continue to provide an excellent portfolio diversifier. Expect Australian bonds to outperform global bonds.
  • Unlisted commercial property and infrastructure are likely to see a slowing in returns over the year ahead. This is particularly the case for Australian retail property. However, lower for even longer bond yields will help underpin unlisted asset valuations.
  • Our base case is for national capital city house prices to fall another 6% or so into 2020 on the back of tight credit, rising supply, reduced foreign demand, price falls feeding on themselves and uncertainty around the impact of tax changes under a Labor Government. An earlier rate cut in May could bring forward the bottom in house prices as in the last two cycles they bottomed four months or so after the first rate cut.
  • Cash and bank deposits are likely to provide poor returns as the RBA cuts the official cash rate to 1% by year-end.
  • The A$ is likely to fall into the US$0.60s as the gap between the RBA’s cash rate and the US Fed Funds rate will likely push further into negative territory as the RBA moves to cut rates. Excessive A$ short positions and high commodity prices will likely prevent an A$ crash though.

Source: AMP CAPITAL ‘Weekly Market Update’

AMP Capital Investors Limited and AMP Capital Funds Management Limited Disclaimer

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Weekly Market Update – 18th April 2019

Weekly Market Update

Investment markets and key developments over the past week

  • Global equity markets were generally up over the past week except in the US (down 0.1%) dragged down by health care stocks due to concern around potential changes in government regulation following Bernie Sanders’ comments around his proposed “Medicare for All” program. Chinese shares continue to rise, up by 3.3% thanks to better data reports indicating evidence of ‘green shoots’ for the global economy. Japanese shares were up by 1.5%, Eurozone equities +1.5% and Australian shares 0.1% higher. The US dollar remains constrained and the Australian dollar is trading at just under 72 US cents. Commodity prices were mixed, with oil prices ending the week slightly higher while iron ore prices slipped a little.
  • In Australia, the Federal election campaign remains in full swing. The “Pre-election Economic and Fiscal Outlook” was released by the Federal Treasury which acts as an independent report to assess the budget. However, as the budget was only handed down two weeks ago there were no major changes to budget estimates or economic assumptions. The polls still suggest a Labor party victory (see chart below), but the Coalition did receive a small boost post Budget (off the back of proposed tax cuts).

Source: Various news sources, AMP Capital

Source: Various news sources, AMP Capital

Major global economic events and implications

  • US earnings season continues with most financials having reported so far. First quarter earnings growth is likely to be low, with earnings expected to be only 0.4% higher year on year. Some slowdown in earnings was expected given that earnings in 2018 received a massive boost from tax cuts. US earnings growth is expected to remain modest until the December quarter where expectations are still for earnings to be over 20% higher than a year ago which looks too optimistic and will need to be revised lower.
  • US data was mixed this week. Retail sales bounced back in March but the Markit manufacturing PMI slightly disappointed expectations (although is still in expansionary territory), the services PMI fell and March housing starts were lower than expected. The Fed Beige Book indicates that activity is still expanding at a “slight to moderate pace” which is consistent with the Fed on hold. The February trade deficit improved and the deficit between China and the US narrowed. The details of the Mueller report were released and while there were some calls for impeachment proceedings to start, it is still seen as unlikely to progress.
  • Chinese data was solid and showed that the central bank’s stimulus measures are working. March quarter GDP was up by 6.4% over the year which was a touch above expectations (of 6.3%). Chinese credit data was good with total social financing (a measure of lending in the economy) stronger than expected. Industrial production growth was also good, up by 8.5% over the year to March, retail sales rose by 8.7% year on year and fixed asset investment was up by 6.3% (ex rural). Chinese home prices are also rising and increased in March by 11.3% year on year.

 Source: Bloomberg, AMP Capital

Source: Bloomberg, AMP Capital

  • Eurozone data continues to disappoint. The April manufacturing PMI fell again to 47.8 and services declined to 52.5. Sentiment according to the ZEW survey showed a further worsening in current conditions but expectations are looking better. European inflation data showed there are inflationary pressures in the Eurozone with core inflation at just 0.8% year on year.
  • The New Zealand consumer price index data surprised on the downside with headline CPI up by 0.1% and annual growth declining to 1.5% with tradable goods prices weaker than expected. The Reserve Bank of New Zealand has been communicating a more dovish tilt recently, responding to the weakness in global growth and perhaps in anticipation of a rate cut by the Reserve Bank of Australia. Markets now expect the Reserve Bank of New Zealand to cut interest rates in May, by 0.25% to 1.5%.

Australian economic events and implications

  • The April Reserve Bank Board minutes had a more dovish tilt compared to recent communication with detailed discussion around impacts on the economy from lower interest rates. But a rate cut at the next Board meeting in May is unlikely. The March jobs data was solid with employment up by 25.7K over the month, with the unemployment rate higher (but still remaining low) at 5.0%. Forward looking readings on job advertisements, vacancies and hiring intentions are slowing but not collapsing and we expect annual employment growth to decline to below 2% over the next six months with a tick up in the unemployment rate to 5.5%. It is still expected that the RBA will cut interest rates twice this year and despite the labour market holding up, views remain because it’s likely that the recent tick up in the unemployment rate (from 4.9% to 5.0%) will continue, home prices will fall more than the RBA expects and the RBA would be concerned about the slowing in global growth (although the global economy should be stronger in the second half of this year).

Source: ABS, AMP Capital

Source: ABS, AMP Capital

  • The March quarter NAB business confidence index declined to 1 from +1 in the prior quarter but this drop in confidence was already known in the monthly NAB business survey data. The next business confidence reading will be important as it gives a reading on business sentiment towards the Federal Budget.

What to watch over the next week?

  • US March quarter GDP may disappoint with consensus indicating 1.8% annualised growth. But, first quarter GDP data in the US tends to be weaker because of negative impacts from weather. March durable goods orders should strengthen after a fall in the prior month. There are also various measures of the US housing market including existing home sales, new home sales and the home price index which may benefit from the fall in bond yields which will lower mortgage rates.
  • No major announcements are expected from the Bank of Japan meeting next week. The focus for Japan in the near term is managing the scheduled consumption tax hike in October. March consumer price data should show low core inflation running around 0.4%, well below the 2% central bank target.
  • The Bank of Canada is expected to keep interest rates at 1.75% at next week’s meeting.
  • In Australia, it will be a quiet week with the Easter and Anzac Day break and the most important release is the March quarter consumer price data. Expect the headline consumer price index to be flat over the quarter with annual growth in prices declining to 1.3%. Petrol prices fell by around 10% over the quarter which will detract around 0.3 percentage points from headline CPI. Discounting pressures also appear to still be present which will weaken clothing and goods prices while food prices were up over the quarter. We expect underlying or core inflation (which the RBA targets) to increase by 0.4% over the quarter or 1.7% over the year, still below target. The RBA is well aware of muted domestic inflation so it’s unlikely that the March data will significantly change the central bank’s inflation forecasts, but it may give the RBA the green light to shift to an easing bias in May given the more dovish communication lately. Import and export price data is released and should show a rise in the March quarter terms of trade.

Outlook for investment markets

  • Share markets – globally and in Australia – have run hard and fast from their December lows and are still vulnerable to a short-term pullback. But valuations are okay, global growth looks to have bottomed and is expected to improve into the second half of the year, monetary and fiscal policy have become more supportive of markets and the trade war threat is receding, all of which should support decent gains for share markets through 2019 as a whole.
  • Low yields are likely to see low returns from bonds, but government bonds continue to provide an excellent portfolio diversifier. Expect Australian bonds to outperform global bonds.
  • Unlisted commercial property and infrastructure are likely to see a slowing in returns over the year ahead. This is particularly the case for Australian retail property. However, lower for even longer bond yields will help underpin unlisted asset valuations.
  • National capital city house prices are expected to fall another 6% or so into 2020 led by Sydney and Melbourne on the back of tight credit, rising supply, reduced foreign demand, price falls feeding on themselves and uncertainty around the impact of tax changes under a Labor Government.
  • Cash and bank deposits are likely to provide poor returns as the RBA cuts the official cash rate to 1% by year end.
  • The A$ is likely to fall into the US$0.60s as the gap between the RBA’s cash rate and the US Fed Funds rate will likely push further into negative territory as the RBA moves to cut rates.

Source: AMP CAPITAL ‘Weekly Market Update’

AMP Capital Investors Limited and AMP Capital Funds Management Limited Disclaimer

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Weekly Market Update – 12th April 2019

Weekly Market Update

Investment markets and key developments over the past week

There were lots of headlines over the last week about the IMF downgrading its global growth forecasts to 3.3% for this year from 3.5% – but it’s really just catching up to last year’s growth slowdown which was reflected in last year’s share market falls. So, while the IMF headlines caused a one-day blip in markets its nothing new. Particularly with central banks already having swung back to being dovish and signs emerging that global growth may be bottoming and starting to improve. But from a big picture sense the return to a downgrade cycle for global growth forecasts after a year or so of upgrades around 2017 provides a reminder that we are still in the constrained growth/low inflation/low rate world that we have been in since the GFC.

  • Source: IMF, AMP Capital

    Source: IMF, AMP Capital

Is a US/European trade war going to take over where the US/China one left off? This issue reared its head again over the last week as progress continues to be made in resolving US/China trade tensions and the US threatened tariffs on US$11bn worth of imports from the EU in retaliation to the EU subsidies of Airbus. And of course, President Trump has to resolve by mid-May whether he will impose tariffs on auto imports from the EU. However, beyond a lot of noise a US trade war with the EU is unlikely. First, the Airbus issue is occurring in the context of a WTO dispute that’s been going for years so it’s not Trump going out on his own. Second, the proposed tariffs on $11bn of imports from the EU is small versus the $360bn of imports from China. Third, it looks designed to get the EU moving on trade talks. Fourth, there is little support for a trade war with the EU amongst the US public or Congress (unlike v China) and the US trade deficit with the EU is small compared to that with China anyway. Finally, another trade war would pose a new threat to Trump’s 2020 re-election. That said the trade issue with EU could go on for a bit and so cause a bit of volatility. But it’s unlikely to be anything like that seen with the US/China trade dispute.

The great central bank retreat to dovishness continues. The minutes from the Fed’s last meeting are consistent with it remaining on hold and bringing quantitative tightening to a tapered end this year. And at its meeting in the last week the European Central Bank was dovish, formally considering making its negative interest rate on bank deposits less onerous for the banks and with President Draghi erring on the side of doing more rather than less to stimulate growth. With Chinese monetary policy remaining easy it’s clear that one of the big concerns for markets last year ie that central bank policy would be too tight remains in retreat for now.

The start of the Australian Federal election campaign ahead of the May 18 election has ushered in a period of economic policy uncertainty for investors. Elections normally see a bit of market nervousness but with a Labor Government promising a very different approach to economic policy than the Coalition involving higher taxes, larger government and more intervention in the economy the May election presents a starker choice than has been the case since elections back in the 1970s and so suggests greater uncertainty for investors than normal around elections.

Meanwhile in Australia, bank funding costs have continued to fall. Bond yields have collapsed driving down the funding cost for fixed rate mortgages, the interest rates on which the banks are now cutting again. And the gap between the bank bill rate and the expected RBA cash rate has now fallen back to around its longer term average of around 0.23% cutting the funding costs for variable rate mortgages and pointing to a reversal of the 0.1 to 0.15% mortgage rate hikes the banks put through last year or at the very least it indicates that they have little excuse not to pass on any RBA rate cuts in full.

 

 Source: AMP Capital

Source: AMP Capital


Major global economic events and implications

Chinese CPI inflation rose in March to 2.3%yoy, but core inflation remained low 1.8%yoy. Underlying inflation pressure is low and won’t constrain policy stimulus.

Australian economic events and implications

Australian economic data was mixed with a modest rise in consumer sentiment and a bounce in housing finance after several months of falls but another fall in job advertisements.

The RBA’s latest Financial Stability Review highlighted the risks around global growth, high household debt, the housing slowdown and bank culture but seemed reasonably confident that the financial system will weather these risks. In particular it noted improved lending standards, stress tests indicating banks have sufficient capital to withstand a 30% or greater fall in house prices and that even in WA where house prices have fallen nearly 20% and unemployment has increased by 3%, mortgage arrears remain relatively low. Overall, the Review looks to be consistent with the RBA’s neutral bias on interest rates for now.

Are prospects for rate cuts fading? Somewhat better economic data lately, tax cuts for low and middle income earners regardless of who wins the election and ongoing RBA optimism about the economy picking up have seen rate cut expectations fade a little bit. However, while this could see the first rate cut pushed back out a bit, it is still likely that the RBA cutting rates twice this year as the housing downturn dampens economic growth and keeps inflation below target for longer.

What to watch over the next week?

In the US, the highlight is likely to be a bounce back in March retail sales (due Thursday) after a soft patch seen late last year. In other data expect to see modest growth in March industrial production and a solid reading for the NAHB’s April home builders’ conditions index (both Tuesday), a slight deterioration in the trade deficit (Wednesday), continued solid readings for April business conditions PMIs (Thursday) and a bounce back in housing starts (Friday).

The flow of US March quarter earnings reports will start to pick up. The consensus expectation is for a 2% decline in earnings per share on a year ago as last year’s tax cut drops out and reflecting slower economic growth. But given the sharp downgrade to expectations seen in recent months there is a good chance we will see greater than normal earnings beats suggesting that actual earnings growth will come in around flat or up slightly. Either way it’s likely that the March quarter will be the low point for earnings growth this year.

Eurozone business conditions PMIs (Thursday) will be watched for more signs of stabilisation.

Japanese inflation data (Friday) is likely to show that core inflation remained weak at 0.4% year on year in March.

Chinese economic activity data due Wednesday is likely to confirm a further slowing in GDP growth, but also show that momentum is likely to improve a bit going forward. March quarter GDP growth (Wednesday) is likely to show a further slowdown to 6.3% year on year from 6.4% in the December quarter, with quarterly growth slowing to 1.4% from 1.5%. However, consistent with recent stimulus and a lessening of trade war fears, March activity data is expected to show a pick up in momentum with growth in retail sales accelerating to 8.4% year on year, industrial production accelerating to 5.9% growth and investment growth picking up slightly to 6.3%.

In Australia, the minutes from the last RBA’s board meeting (Tuesday) are expected to show that the RBA’s neutral bias on future interest rate moves remains in place. Meanwhile, March jobs data (Thursday) is expected to show a 10,000 gain in employment and a rise in unemployment back to 5%.

Outlook for investment markets

Share markets – globally and in Australia – have run hard and fast from their December lows and are vulnerable to a short-term pullback. But valuations are okay, global growth is expected to improve into the second half of the year, monetary and fiscal policy has become more supportive of markets and the trade war threat is receding all of which should support decent gains for share markets through 2019 as a whole. Low yields are likely to see low returns from bonds, but government bonds continue to provide an excellent portfolio diversifier. Expect Australian bonds to outperform global bonds.

Unlisted commercial property and infrastructure are likely to see a slowing in returns over the year ahead. This is particularly the case for Australian retail property. However, lower for even longer bond yields will help underpin unlisted asset valuations.

National capital city house prices are expected to fall another 5-10% into 2020 led by Sydney and Melbourne on the back of tight credit, rising supply, reduced foreign demand, price falls feeding on themselves and uncertainty around the impact of tax changes under a Labor Government.

Cash and bank deposits are likely to provide poor returns as the RBA cuts the official cash rate to 1% by year end.

The A$ is likely to fall into the US$0.60s as the gap between the RBA’s cash rate and the US Fed Funds rate will likely push further into negative territory as the RBA moves to cut rates.

Global share markets fell slightly over the last week on global growth concerns and renewed US/Europe trade war fears. Australian shares rose though playing catch up to the previous week’s rally in global shares with energy, tech and real estate stocks being the main drivers. Bond yields were flat in the US but fell elsewhere. Oil and iron ore prices continued to push higher with supply issues supporting both. The US$ fell slightly and this saw the A$ rise slightly.

US economic data was confusing but on balance strong. While job openings fell in February since then payrolls have rebounded and unemployment claims have collapsed to a post October 1969 low suggesting that job openings and hirings will rebound again. Small business optimism rose slightly in March and remains solid. Meanwhile core inflation was weaker than expected in March. Which is of course partly why the Fed can remain on hold for now but with the labour market remaining very tight and energy costs pushing back up it’s hard to see them cutting rates any time soon. Which could mean that the next big move in US bond yields will be up (not down).

 

Source: AMP CAPITAL ‘Weekly Market Update’

AMP Capital Investors Limited and AMP Capital Funds Management Limited Disclaimer

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Weekly Market Update – 5th April 2019

Weekly Market Update

Investment markets and key developments over the past week

  • Global share markets pushed higher over the last week helped by more “green shoots” pointing to improving global growth this year, including Chinese business conditions PMIs and the US ISM index and a stabilisation in Eurozone composite PMIs, another Goldilocks jobs report in the US and more indications that the US and China are getting closer to a deal on trade (albeit with issues around enforcement and the removal of last year’s tariff hikes yet to be agreed). For the week, US shares rose 2.1%, Eurozone shares gained 3.1%, Japanese shares rose 2.8% and Chinese shares rose 4.9%. After an initial rally to a six month high, helped by the positive global lead and some Budget stimulus, the Australian share market gave up all its gains, not helped by election uncertainty to end the week flat. Reflecting the global risk on tone bond yields rose. While the copper price fell, oil rose as did iron ore helped by a new (cyclone-related) supply disruption. The US dollar was little changed as was the A$.
  • The Brexit comedy continues. The UK got no closer to agreeing a Brexit plan, PM May is requesting a short extension to 30 June, however the EU may push for a longer extension to allow time for a deal to be agreed. A long extension raises all sorts of issues around the UK being forced to participate in EU elections in May, new UK elections and another referendum. But remember Brexit is merely a sideshow for global investors.
  • The 2019-20 Australian Federal Budget gets back to surplus but is an election budget and so fails to really excite. To be sure, this budget contained good news with help for low to middle income households, an enhanced plan for reducing taxes next decade (or giving back fiscal drag to be precise), more tax cuts for small business and a further uplift in infrastructure spending, all with a return to surplus after 11 years in deficit. After several years of being wide off the mark, budget projections since the 2015-16 Budget have been pretty consistent in terms of their surplus timing and we are now there (well at least we will be in a few months). Against this though, the immediate boost to low-to-middle income households is relatively modest and views remain that the Government’s GDP growth and wages’ forecasts are on the optimistic side.

Source: Australian Treasury, AMP Capital

Source: Australian Treasury, AMP Capital

  • In terms of the election, Opposition leader Bill Shorten’s Budget reply speech confirmed that a Labor Government will adopt a very different approach to economic policy. The key elements of this include supporting the Government’s immediate “tax cuts” for middle income earners and increasing them for low income earners, but increasing (not decreasing) tax rates for higher income earners, restricting negative gearing, halving the capital gains tax discount, ending cash refunds for franking credits, a more aggressive climate policy, higher minimum wages with some labour market re-regulation and more spending on health and education. As always, much of this will be dependent on Senate passage and that’s not assured in some areas (like negative gearing). But it will likely lead to nervousness in the Australian share market and the changes to negative gearing and capital gains tax will be negative for property prices. If Labor wins, expect a mini-budget in the September quarter.
  • But it’s clear that both sides of politics are aiming for budget surpluses and committed to tax relief for low and middle income households to be received after they complete their 2018-19 tax returns. The latter will provide some boost to spending in the September quarter (although the Rudd payments in the GFC indicate that much will be saved) which along with likely RBA rate cuts, continuing strong infrastructure spending, improving business investment and strong export demand should keep the economy growing despite the drag from the housing downturn.

Major global economic events and implications

  • US data was mostly encouraging. On the downside, underlying capital goods orders and retail sales fell in February. But the level of capital goods orders remains high, retail sales for January were revised up, construction spending and auto sales were strong, payroll employment rose solidly in March, jobless claims fell to a new post-1969 low and business conditions ISMs and PMIs are solid and consistent with reasonable growth. March jobs data confirmed that “Goldilocks” (not too hot, not too cold) is alive and well in the US, with a strong gain in new payrolls of 196,000, three month average jobs growth running at 180,000, unemployment remaining very low at 3.8%, labour underutilisation also remaining very low at 7.3% and yet wages growth staying benign at 3.2% year-on-year. So the Fed can and will remain on hold.
  • The Eurozone’s composite business conditions PMI fell slightly, but it is showing tentative signs of stabilising. Meanwhile, unemployment held steady at 7.8% in February but with core inflation falling to 0.8% year-on-year in March, pressure remains on the ECB to boost growth.
  • Japan’s March quarter Tankan survey showed a deterioration in business conditions for manufacturers (albeit from relatively high levels) but conditions for non-manufacturers remain strong.
  • Chinese business conditions PMIs rose in March adding to signs that Chinese growth may be bottoming. To be sure seasonal volatility associated with the timing of the Lunar New Year holiday may be helping but stimulus is likely helping too.

Australian economic events and implications

  • Australia saw some upbeat February data over the last week with a bounce in retail sales and building approvals and the trade surplus rose to a new record high. And the pace of house price falls slowed a bit in March according to CoreLogic. This all provides a bit of confidence that March quarter GDP growth may have improved a bit from the dismal pace of 0.3% and 0.2% seen in the September and December quarters respectively. However, there are reasons for caution. First, economic data often runs hot and cold. Since Christmas we have had a long cold patch so a hot patch isn’t surprising. Second, its hard to see the surge in food sales, department stores, clothing and household goods that drove the bounce in February retail sales being sustained given ongoing soft wages growth and falling home prices. Third, the bounce in building approvals was driven by volatile apartments and the trend remains down. Fourth, the record trade surplus is good news, but it’s mainly being driven by high bulk commodity prices not by volumes. Fifth, business conditions PMIs and business confidence readings were soft in March. Finally, we saw the pace of home price declines slow a year ago only to accelerate again and in any case house price declines are now quite broad-based across capital cities and the negatives that are driving house price falls notably in Sydney and Melbourne remain in place, including tight lending standards, record unit supply, a collapse in foreign demand, uncertainty around the tax treatment of property investment and price falls feeding on themselves. So it is expected to still see further soft economic growth and home price falls ahead.

Source: CoreLogic, AMP Capital

Source: CoreLogic, AMP Capital

  • Finally, while the Melbourne Institute’s Inflation Gauge saw a bit of a bounce in March, this seems to happen every few months and underlying inflation is still running at just 1.6% year-on-year.
  • Meanwhile, the RBA remained on hold for the 32nd month in a row, but there were two marginal dovish tilts in its post meeting statement. The first was in acknowledging weak December quarter growth, particularly in consumer spending and the second in noting that it will “continue to monitor developments”.

What to watch over the next week?

  • In the US, the minutes from the Fed’s last meeting (due Wednesday) will likely confirm its dovishness and this is likely to be supported by March CPI data (also due Wednesday) showing core CPI inflation remaining around 2.1% year-on-year. Job openings and hirings for February are likely to have remained strong and small business optimism (both due Tuesday) will be watched for a bounce.
  • US March quarter earnings reports will start to flow. These are likely to see a distinct slowing to a slight decline or flat year-on-year as last year’s tax cut drops out and in response to slower growth but it’s also likely to be the low point for this year.
  • The European Central Bank (Wednesday) is unlikely to undertake further monetary easing, having just done so at its last meeting, but it’s likely to signal a willingness to do more.
  • Chinese data for March is expected to show continuing benign underlying inflation (Thursday) and an improvement in export and import growth (Friday). Credit data will also be released.
  • In Australia, expect a continuing downtrend in housing finance (Tuesday) and a possible bounce in consumer confidence (Wednesday) thanks to the tax cuts. The RBA’s six monthly Financial Stability review will be released on Friday.

Outlook for investment markets

  • Share markets – globally and in Australia – have run hard and fast from their December lows and are vulnerable to a short-term pullback. But valuations are okay, global growth is expected to improve into the second half of the year, monetary and fiscal policy has become more supportive of markets and the trade war threat is receding, all of which should support decent gains for share markets through 2019 as a whole.
  • Low yields are likely to see low returns from bonds, but they continue to provide an excellent portfolio diversifier and bond yields could still fall further in the next few months. Expect Australian bonds to outperform global bonds.
  • Unlisted commercial property and infrastructure are likely to see a slowing in returns over the year ahead. This is particularly the case for Australian retail property. However, lower for even longer bond yields will help underpin unlisted asset valuations.
  • National capital city house prices are expected to fall another 5-10% into 2020, led by Sydney and Melbourne on the back of tight credit, rising supply, reduced foreign demand, price falls feeding on themselves and uncertainty around the impact of tax changes under a Labor Government.
  • Cash and bank deposits are likely to provide poor returns as the RBA cuts the official cash rate to 1% by yea-end.
  • The A$ is likely to fall into the US$0.60s, as the gap between the RBA’s cash rate and the US Fed Funds rate will likely push further into negative territory as the RBA moves to cut rates. Being short the A$ remains a good hedge against things going wrong globally.

Source: AMP CAPITAL ‘Weekly Market Update’

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