Week in Review
Global equities remained on the back foot last week despite tentative signs of a thawing in US-China trade tensions. China has submitted a list of (modest) trade opening measures while Trump has hinted he may at least postpone planned tariff increases due to take effect in the New Year. Concerns over slowing iPhone sales, however, kept the market jittery with regard to tech stocks, and the overall direction in equities. A further slump in oil prices added to the risk-off sentiment and contributed to a sizable drop in US 10-year bond yields. US economic data was equity market supportive, however, with solid growth in retail sales and a benign CPI inflation report.
One possible new emerging theme in light of recent market volatility is a somewhat more dovish Fed. On Friday, Fed vice chair Richard Clarida suggested US rates were getting “close to neutral” and he also noted signs of slowing global growth. While it is still very likely the Fed will hike again next month – and probably twice more in H2’19 – sentiments as expressed by Clarida are consistent with my view that the Fed might well announce a “pause” in its rate hike schedule by mid-19. Weakness in US bond yields and the $US suggest the market could be warming to this view, but as yet, Wall Street has not taken much notice. Of course, much will depend on the course of US inflation, especially wage inflation, which makes the monthly readings on average hourly earnings in the US payrolls report so crucial. It’s also worth watching trends in US housing, where some softening is now emerging in light of higher interest rates.
Locally, economic data remained encouraging, with solid growth in employment and a further modest lift in wage growth. The NAB index of business conditions edged down but remained at high levels. Most heartening, the Westpac measure of consumer confidence also lifted further as low interest rates and solid employment growth offset concerns about weaker house prices.
Thursday’s thanksgiving holiday will interrupt and shorten the US trading week, with attention likely to remain focused on any further details on US-China trade. The ongoing Brexit and Italian budget disputes also roll on, though they remain unlikely to significantly impact global markets.
In Australia, while analysts will again dissect the minutes from the latest RBA meeting for any hint of higher interest rates on the horizon, these efforts are likely to remain in vain. Despite good economic growth, low wage inflation and the ongoing correction in Sydney house prices suggest the RBA remains comfortably on hold. In turn, this suggests the recent rebound in the $A should also soon run out of steam.
Have a Great Week!