Week in Review
Despite positive noises on US-China trade talks, global stocks saw fit to focus on the negatives last week, such as signs of weaker growth in Europe and China and the risk of a US Government shutdown (yet again!). Technically, the US S&P 500 ended the weak clinging to key levels just above the week-end lows of earlier this year around 2,580.
China’s monthly “data dump” on Friday revealed weaker than expected growth in retail spending and industrial production, which seems likely to elicit another (debt fuelled) stimulus programme in the new year. It should also make China even keener to conclude a trade deal, something President Trump was happy to point out last week.
The market also noticed weak French manufacturing data, which was not surprising given the “yellow vest” revolt. The UK’s ongoing Brexit debacle is not helping. Meanwhile, the European Central Bank ploughed ahead with its longstanding plan to end further net bond purchases next month, even as it conceded Eurozone growth – while likely to remain OK – won’t be as strong next year as it had earlier thought.
In Australia, the key NAB and Westpac measures of business and consumer confidence held up well, despite the ongoing slump in Sydney and Melbourne house prices.
The focus this week is undoubtedly the US Federal Reserve, which is almost certain to lift rates to 2.5% on Wednesday. Of more interest will be the extent to which the Fed tweaks its statement and “dot point” projections to water down the prospect of further rate rises next year.
My view is that the dot points will shift to a median expectation among Fed voting members of two, rather than three, rate hikes in 2019. The Fed statement also seems likely to ditch reference to “further gradual increases” as being necessary, but rather suggest further moves will be dependent on how the economy evolves. This would open up the prospect of a pause in Fed rate hikes until possibly June next year. This should be an equity market positive, but hopes for a more dovish Fed have been building in the market for some time.
Locally, the key development is today’s Mid-Year Economic and Fiscal Outlook. As widely flagged, the project budget balance has improved on the back of stronger than expected commodity prices and local employment. Among economic forecasts, wages growth was revised down to more believable levels. Likely reflecting the weak Q3 GDP outcome – economic growth is now expected to be only 2.75% this financial year ( from 3%), compared with the RBA’s current forecast of 3.25%!
Overall, the MYEFO is consistent with an economy doing moderately well – good enough to avoid the need for even lower local rates, but also neither strong enough to suggest the RBA will lift rates anytime.
Have a Great Week!