Global equities pulled back from record highs last week – reflecting an early batch of mixed US earnings results and continuing disappointment that the Fed is still not inclined to cut rates by an aggressive 0.5% next week. Trump’s renewed sabre rattling – suggesting a deal with China was still some way off and he could still raise tariffs – didn’t help. Meanwhile, US consumer spending held up nicely, with June retail sales comfortably beating market expectations. Gold and iron-ore prices reached new six-monthly highs, though oil slumped due to an easing in US-Iranian tensions.
The bottom line of all this, however, is that trade tensions have helped modestly slow global growth in recent months and US earnings are also going through a slow patch. With US equity valuations back at relatively high outright levels, the market is hoping for stronger interest rate support than the Fed is willing to give at this stage. With the US labour market tight and consumer spending still solid, however, the Fed quite rightly is not caving into aggressive market (and Presidential) demands. As it stands, the Fed is still on track to cut rates by 0.25% next week, but a showdown between the Fed and markets (not to mention the President) appears to be looming in the months that follow if the US economy keeps growing at least modestly.
As regards China, while Q2 GDP confirmed the widely expected slowdown, more timely industrial production and retail sales were firmer – suggesting the economy overall continues to hold up reasonably well despite the trade wars.
Highlights globally this week include a parade of tech earnings reports, from the likes of Facebook, Amazon, and Alphabet (Google). So far in the tech space Netflix has disappointed while Microsoft has crushed it. My feeling is that tech overall should hold up OK, which is supportive of continued relative good performance globally by the Nasdaq-100 Index.
Other things to watch for include the likely installment of Boris Jonson as new UK Prime Minister on Tuesday, which opens up a Brexit showdown between himself, the UK Parliament and the EU over coming months. The European Central Bank will also likely signal a shift to an easing bias at it’s meeting on Thursday, with the market now pricing a move in rates further into negative territory by September – which will do little to help the economy and only make life harder for EU banks. It might also antagonise Trump, with growing talk of possible US currency intervention at some stage – which if true, would add to recent gold price strength.
Given the global manufacturing slowdown, US data is also worth watching – with a US PMI manufacturing survey and durable goods orders out this week. Although unlikely, very weak reports could perversely boost equities if it kept hopes alive for a 0.5% US rate cut next week.
Last week’s RBA minutes and labour market report only affirmed my view that the RBA will likely cut rates further in coming months. The RBA indicated it is watching the labour market like a hawk. What it’s likely to see will not be pleasing. After recent strong results, employment growth was flat in June and the unemployment rate held at 5.2%. As I’ve previously explained, moreover, forward indicators suggest the unemployment rate will edge higher in coming months due to the housing and consumer slowdown.
There’s little data of note locally this week, with the highlight a (likely still dovish) speech by RBA Governor Lowe on Thursday.
Have a Great Week!