America’s Goldilocks Economy

BY David Bassanese | 31 July 2017
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Global Markets Review & Outlook

  • It was a fairly flat week across global markets, with US stocks still flirting with record highs, the $US on the back foot, and bond yields still largely range-bound. The big market move was a solid 8.6% rebound in oil prices after Saudi Arabia pledged to cut exports in order to reduce global excess supply. US shale oil producers rubbed their hands with glee!
  • The major market event was the dovish interpretation traders placed on the Fed’s post-meeting policy statement. Exactly why is not clear: although the Fed acknowledged inflation remained below its 2% target level, it still indicated “gradual increases” in rates is still likely, and balance sheet normalisation could begin “fairly soon”.
  • That said, the rally in bond yields and softness in the $US dollar on the day of the Fed’s announcement really only unwound the moves of the previous day – so it appears markets simply wrong-footed themselves. It still seems likely the Fed will announce the start of balance sheet normalisation at its next meeting in September, and hike rates again in December (though markets still see the latter as only a 50% chance).
  • The US earnings season, meanwhile, continues to modestly impress, with a slightly higher than usual proportion of companies (73%) beating analyst estimates. US economic data also remains broadly supportive of stocks, with modest growth and low inflation. June quarter GDP growth was neither “too hot nor too cold”, rebounding to an annualised 2.6% pace (in line with market expectations) after downwardly revised growth of only 1.2% (from 1.4%) in the March quarter. Wage growth is also benign: the wage cost index rose only 0.5% in the June quarter, after a 0.8% gain the March quarter to keep annual growth unchanged at 2.3%.
  • Not helping the $US dollar, however, were further signs of Washington gridlock, with the Republican controlled Senate again failing to pass a health care changes (it’s hard to call them “reforms”). As I noted last week, this does not bode well for tax cuts, as similar disagreement seems likely if proposed tax “reforms” appear to greatly favour the rich!

Australian Market Review & Outlook

  • Closer to home, the dovish reaction to the Fed’s statement helped the $A crack US80c, albeit briefly. Thankfully for the economy, the $A is not as strong against other currencies – as much of its “apparent” strength reflects general $US weakness. While the $A has lifted 10% against $US since the start of the year, it’s down 0.8% against the Euro and up only around 5% against the Yen and on a trade-weighted index (TWI) basis.
  • As I suggested last week, both the CPI result and RBA Governor’s Lowe’s speech helped pour cold water over the prospect of a local hike in rates anytime soon. Underlying inflation, although edging higher in recent quarters, still remained below the RBA’s 2 to 3% target band in the June quarter. Phil Lowe, meanwhile, bemoaned the lack of wage growth nationally (and internationally), which he in part attributed to worker “perception” that they lack bargaining power due to globalisation and new technology.
  • Although the RBA meets this week and also releases its Quarterly Statement on Monetary Policy, no change is expected and commentary is likely to further confirm recent signals that the Bank retains a “neutral” policy bias. This “steady as she goes” approach should be supported by fairly mixed economic data. While June building approvals (due Wednesday) are expected show a modest rebound – after the previous month’s slump – the trend will remain down. By contrast, retail sales on Friday are due to show a more modest gain after surprisingly strong results in recent months.

Have a great week!

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