The Week in Review
- The key global development last week was solid US economic data in the form of a surge in consumer confidence and a modest upward revision to Q3 GDP. This helped support equity markets and the $US as the disappointment regarding President Trump’s failure to pass healthcare reforms started to wane. Bond yields remained steady, however, as Fed officials continued to give conflicting signals on the outlook for rates – the market still sees a Fed hike by end-June as only a 50-50 chance.
- Also supporting the $US were media signals from the European Central Bank hosing down expectations it was about to announce a tightening in policy anytime soon – or at least not before June. Hints from OPEC that members wanted to extend their six-month production cut agreement also supported oil prices. China’s PMI data remained solid (as expected) while the UK’s formal Brexit notification took place without a hitch – though there are now worries about a possible Scottish referendum which is hampering any rebound in the Pound despite still better than feared UK economic data.
Closer to home, the key development were further “out of cycle” rate hikes by the banks, which cheered investors as it seemed a positive for net interest margins and profits. My blog post on the issue is here. This move, together with a positive global equity back drop, helped the S&P/ASX 200 Index pierce through the 5800 level after several previous unsuccessful attempts. With the iron ore price still under downward pressure – despite positive Chinese data – resource stocks lagged last week. Local data remained mixed, with the official measure of job vacancies rising but credit data revealing another worrying soft read of business credit growth for the second month in a row.
Likely Highlights in the Week Ahead
- The key data highlight this week will be Friday’s US payrolls, with another solid result expected. A key indicator to watch will be average hourly earnings, with markets sensitive to any signs of wage acceleration as it would be a red flag to the Fed. The US ISM manufacturing index is also released overnight, which is expected to remain solid – helped by ongoing recovery in the oil sector and housing strength. Minutes of the recent Fed and ECB meetings are due – with main interest in the number of Fed members itching to raise rates earlier rather than later.
- Locally, February building approvals and retail trade data are the main highlights and are due to today. Both should be consistent with the still challenging outlook for the economy. Indeed, consumer spending has slowed of late and building approvals continue to trend down. Despite this, the RBA is likely to express continued economic optimism in its statement announcing no changing interest rates at its policy meeting tomorrow.
- The upside break out in Australian equity market last week was a hopeful sign. But that said the risks are that this will be another failed move hire due to high valuations and continued sluggish economic growth.
- Not helping is the fact that the post-US election “Trump Pump” finally looks to be petering out. With outright PE valuations high, the Fed sounding hawkish, and markets having had a good run in recent months, a decent correction should be on the horizon – but with so many apparently ready to “buy the dip”, the pullback so far has been fairly shallow. Indeed, a renewed focus on tax cuts by Trump – and the upcoming earnings reporting season in a few weeks – might give the market renewed optimism, or at least continue to keep market pull backs well supported.
Have a great week!