- Japanese data has been mixed with a fall in unemployment, a rise in the ratio of job openings to applicants and stronger than expected household spending but continuing falls in wages.
- Chinese business conditions PMIs fell back slightly in December but remain at strong levels consistent with ongoing economic expansion.
Australian economic events and implications
- Australian economic data releases over the past three weeks have generally been solid with another surge in November retail sales (up 7% month on month as Victoria reopened), further gains in building approvals, another strong rise in job ads (which are now actually up 5% year on year) and a strong rise in imports and another strong rise in home prices in December leaving them up 2% through 2020. Credit growth remained soft but looks like it might be bottoming and APRA data showed that the share by value of housing loans in deferral had fallen to just 2.8% from 11% in May, suggesting that the winddown of bank payment holidays won’t pose a major problem for the property market.
- Of course, this data was before the latest coronavirus scare in NSW. While new cases may be coming under control again the scare compounded by partial lockdowns and a return to border closures will weigh a bit on confidence which may not be enough to stop the recovery, but it could slow it. This along with the reality that we still have a long way to go to get to full employment and the continuing surge in the value of the A$ acting as a dampener on the recovery will all likely see the RBA remain under pressure to maintain easy money. So, a rate hike remains several years away, and the RBA is still likely to extend its QE program beyond April to match other central banks QE programs in order to help slow the rise in the A$.
What to watch over the next week?
- In the US, expect a slight rise in core CPI inflation for December (Wednesday) to 1.7%yoy, a 0.2% gain in industrial production but a slight fall in December retail sales and a slight decline in New York region manufacturing conditions in January (all due Friday). Fed Chair Powell is expected to signal that the Fed remains ultra-dovish (Thursday) and data for small business optimism and job openings will also be released.
- Chinese CPI inflation for December (Monday) is expected to move back to zero from -0.5%yoy, trade data (Thursday) is expected to show some slowing in export growth but a pick-up in import growth and credit growth is likely to remain solid.
- In Australia, expect final November retail sales data (Monday) to confirm a 7% gain, November ABS job vacancies (Wednesday) to show a further rebound and housing finance commitments (Friday) to show a further 2% gain.
Outlook for investment markets
- Shares are at risk of a short term correction after having run up so hard recently (with coronavirus and associated lockdowns being the main near term threat) and 2021 is likely to see a few rough patches along the way (much like we saw in 2010 after the recovery from the GFC). But looking through the inevitable short-term noise, the combination of improving global growth helped by more stimulus, vaccines and low interest rates augurs well for growth assets generally in 2021.
- We are likely to see a continuing shift in performance away from investments that benefitted from the pandemic and lockdowns – like US shares, technology and health care stocks and bonds – to investments that will benefit from recovery – like resources, industrials, tourism stocks and financials.
- Global shares are expected to return around 8% but expect a rotation away from growth heavy US shares to more cyclical markets in Europe, Japan and emerging countries.
- Australian shares are also likely to be relative outperformers helped by better virus control, enabling a stronger recovery in the near term, stronger stimulus, sectors like resources, industrials and financials benefitting from the rebound in growth and as investors continue to drive a search for yield benefitting the share market as dividends are increased resulting in a 4.4% grossed up dividend yield. Expect the ASX 200 to end 2021 at a record high of around 7,200.
- Ultra-low yields and a capital loss from a 0.5-0.75% or so rise in yields are likely to result in negative returns from bonds.
- Unlisted commercial property and infrastructure are ultimately likely to benefit from a resumption of the search for yield but the hit to space demand and hence rents from the virus will continue to weigh on near term returns.
- Australian home prices are likely to rise another 5% or so this year being boosted by record low mortgage rates, government home buyer incentives, income support measures and bank payment holidays but the stop to immigration and weak rental markets will likely weigh on inner city areas and units in Melbourne and Sydney. Outer suburbs, houses, smaller cities and regional areas will see relatively stronger gains in 2021.
- Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%.
- Although the A$ is vulnerable to bouts of uncertainty about coronavirus and China tensions and RBA bond buying will keep it lower than otherwise, a rising trend is still likely to around US$0.80 over the next 12 months helped by rising commodity prices and a cyclical decline in the US dollar.
Source: AMP CAPITAL ‘Weekly Market Update’
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