The Week in Review
- One of the three global macro “Trump trades” persists across global markets, with equities rising yet the $US and bond yields still largely treading water. Last week saw Wall Street move to new record highs, with the S&P 500 up 1.5% despite a shockingly erratic Donald Trump press conference and hints from the Fed’s Janet Yellen that a March rate rise remains a possibility. Helping is the fact global economic data remains encouraging and everyone is waiting for Trump’s “phenomenal” announcement on tax. On the negative side, there is some nervousness creeping into markets ahead of the French Presidential elections starting in April – given latest polling suggesting that the National Front’s Marine Le Pen is now favourite to win the first of two voting rounds. Market favourite Emmanuel Macron lost some support last week – both on the right by criticising France’s colonial past, and on the left by sympathising with those that oppose gay marriage.
- Locally, economic data remained generally positive, with the NAB business conditions index recording an impressive surge in January to be at the above-average buoyant levels that were evident prior to the 2007-08 financial crisis. By sector, services remain strong, with the improvement in recent months coming from a lift in mining, manufacturing and transportation. Modest employment growth was also recorded in January, with the unemployment rate ticking down to 5.7% (from 5.8%), although there remains concerns with the “quality” of jobs growth given all of the gains came from part-time employment. Also supporting our market was a further 7% surge in iron ore prices to an incredible $US92/tonne and CBA’s decision to lift dividends a touch following its earnings announcement – which has been take as a positive sign that bank’s are feeling confident about not needing to raise further capital anytime soon.
Likely Highlights in the Week Ahead
- Little in the way of major global data is evident this week, meaning focus will remain on Trump and the Fed. Minutes from the last Fed meeting are released Wednesday, which may shed further light on how close it is to raising rates next month. Trump’s tax plans could be announced, though how these will be paid for remains to be seen – as his proposal for a “border adjustment tax” – which is effectively a trade-protectionist tariff – seems to face increasing Senate opposition.
- In Australia, the earnings season rolls on with miners like BHP this time in the spotlight – we should expect some impressive results though perhaps cautious outlook statements given the extreme level of iron ore prices. So far at least, we are seeing a modestly higher than average level of earnings “beats.” Construction data on Wednesday and business investment data Thursday will indicate how much of a bounce back in December quarter GDP we might expect after poor weather held back construction in the September quarter. As always, the investment data will also provide an update on corporate investment intentions – any signs that the recent lift in business confidence has flowed through into a stronger outlook for non-mining investment remains a key focus. RBA minutes and presentations by Governor Lowe are also of interest this week, though we might not expect much new given the RBA seems comfortably on hold for the foreseeable future.
- Global markets are currently enjoying what we might call a “Goldilocks” environment, with an improving growth and earnings outlook while, at least of late, a lack of follow though in terms of higher bond yields and the US dollar. The prospect of a “phenomenal” announcement on tax by Donald Trump at some stage in coming days or weeks is keeping short-sellers on the sidelines. In a classic case of “buy rumour/sell the fact”, we might seem more profit taking/consolidation in the market only after his tax/stimulus plans are laid bare.
- Locally, we are all waiting for the seemingly inevitable (but so far elusive) correction in iron ore prices and the $A, while the RBA is sidelined for the foreseeable future. While annual underlying inflation is likely to stay sub-2% in coming quarters, the RBA seems unlikely to cut rate again unless there is also a clear move higher in the unemployment rate to 6% or more. At present, however, the labour market is grinding sideways – with just enough employment growth each month to keep the unemployment rate broadly steady.
Have a great week!