Global stocks still looking good even as bond yield lift
Global stocks continued to inch ahead last week – still pushing record highs – on the back of ongoing positive US earnings reports and global economic data. All up, US economic data still appears to be rebounding nicely after being negatively affected by recent hurricanes, and this should be affirmed by a strong rebound in October payrolls this Friday (market + 315K). Also of interest this week will be any signs of much firmer wage growth in either Friday’s payrolls report or Tuesday’s Q3 employment cost index.
As regards the Q3 US earnings reporting season, it remains a case of so far so good – with a modestly higher than usual number of companies beating expectations, particularly among the tech stocks that dominate our NASDAQ-100 ETF. Adding to the good cheer, the US Congress passed a budget plan (albeit narrowly) that keeps alive the market hope that deep US tax cuts might be agreed within months.
$US and bond yields moving higher
Also notable last week was the European Central Bank meeting, which finally affirmed a cut back in bond purchases next year – but with enough qualifications that market’s took the decision dovishly and pushed down the Euro. With the market pushing up the Euro all year in expectations of such an announcement, it could now be a case of “buy the rumour, sell the fact” and we may see further Euro weakness ahead.
Markets are also nervously awaiting US President Trump’s decision regarding who will run the Fed next year – which we should learn this week. Concern that John Taylor (considered more hawkish than Yellen) could get the nod helped push up bond yields last week, though in reality the choice seems unlikely to dramatically affect the outlook for Fed policy in the coming year either way.
Don’t bet on surging oil prices
Although oil prices also lifted last week – as Saudi Arabia indicated its support for an extension of OPEC production cuts – the upside appear firmly capped give the ability of US producers in particular to fill any gaps that might emerge.
Political risk and soft economy hurt local stocks
The recent super charged gains in local stocks came to an end last week with the S&P/ASX 200 edging back 0.1%. Not helping was the High Court’s shock decision to disqualify many leading Federal politicians, including the Deputy Prime Minister! That said, the local market should get a positive boost on Monday morning (futures are up 0.6%) following the strong 0.8% gain in the US S&P 500 on Friday.
Last week’s lower than expected CPI inflation result (core annual inflation remains just under 2%), together with comments from RBA Deputy Governor Guy Debelle suggesting wage growth could remain low for a long while, affirmed my view that the RBA remains unlikely to hike rates in 2018. These dovish results – combined with a firmer $US – combined to push the $A down 1.8% last week. The $A’s recent attempt to break and hold above US80c appears finally to have been firmly rejected.
We’ll get key updates on the economy this week via house prices (Wed), building approvals (Thurs.) and retail trade (Fri.). Look for more property doomsayers to dominate the headlines mid-week should Core-Logic report a second successive small monthly decline in Sydney house prices took place in October (after a 0.1% drop in September). Also of note will be whether there’s much rebound in retail sales in September after shockingly weak results in recent months (markets anticipate a 0.4% lift). Either way, consumer spending looks to have been a major drag on economic growth in the quarter.