Bassanese Bites | 1 May 2017 | U.S earnings bump

Earnings Bump

BY David Bassanese | 1 May 2017
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The Week In Review

      • It was a positive week for risk markets with the US earnings reporting season still going relatively well (especially for tech firms), and continued optimism that pro-EU French Presidential candidate Macron will win this weekend’s find round of voting. Less uplifting, Trump also outlined his tax plans, which went down like a led balloon on Wall Street. As the package containing many elements, the market reacted with scepticism over how much would actually pass the Congress. It didn’t help that so much “good news” regarding Trump’s tax ambitions has already been priced into the market.
      • Friday’s Q1 US GDP result of 0.7% (annualised) was a bit weaker than the already subdued market expectation of 1.2%, though it can be largely attributed to volatility – with underlying US growth drivers still solid.  Also of note was a larger than expected 0.8% Q1 gain in the US Employment Cost Index – which points to the tightening US labour market and simmering wage pressures.  Again notable last week, nonetheless, was the fact that despite the solid 1.5% gain in the US S&P 500, the $US actually fell (largely reflecting Euro strength) and bond yields hardly budged.

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      • Closer to home, the main highlight was the March quarter consumer price index result. The lift in annual underlying inflation from 1.5% to 1.8% supports the view that inflation has at least  bottomed, though it’s still debatable if underlying inflation lifts further – into the Reserve Bank’s 2 to 3% target band – or stubbornly holds below 2% in coming quarters.  My call is the latter, which will leave the RBA with a modest policy easing bias and the inclination to cut rates if the unemployment rate pushes past 6%.  The global risk-on sentiment supported financials last week, though resources eased back further even though iron ore prices stabilised.

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Likely Highlights in the Week Ahead 

      • While a natural market focus, the Fed’s Wednesday meeting is likely to be dull as no move is likely and the accompanying statement will try hard not to rock the boat. Otherwise, Friday’s US payrolls report is likely to remain solid, with employment growth of around 200k. Following on from Friday’s strong wage cost index result, moreover, the market will watch growth in average hourly earnings closely. The US earnings season also rolls on which, so far at least, has been market pleasing.
      • Locally, the RBA meets and – like the Fed – we should not expect any fireworks. The RBA’s Quarterly Statement is released on Thursday, which should reveal a modest downgrade to the growth outlook due to weaker than expected consumer spending of late. Budget rumours are also likely to circulate ahead of next week’s event – which is shaping up to focus on infrastructure and housing affordability measures.

The Wrap

      • Global equities continue to hold up relatively well, with a number of positive influences – the French Presidential election, Trump’s tax cuts, and the US earnings season – all working in their favour. The main negatives remain high outright price- to-earnings valuations and the lingering risk of a North Korean shock.  While not yet a major market focus, the risk of a US wage uplift also lingers. 
      • Also of interest is the fact that the $US and bond yields have so far failed to rebound much in an otherwise “risk on” environment. If the risk-on environment is really back in vogue, however, we should at least expect higher bond yields soon, which should place some downside pressure on valuations. In turn, that will make continued decent equity gains ever more reliant on solid earnings growth – which so, far at least, seems to be the case.
      • In turn, rising bond yields will particularly favour global banks (see our BNKS ETF).  US tax cuts generally – and especially plans to encourage US firms to bring profits back from offshore (which might fund share buy backs) – would also favour technology and health care stocks, which are heavily represented in our Nasdaq-100 ETF (NDQ).  Growing optimism surrounding Europe is also favouring our HEUR ETF.

Have a great week!

 

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