The Week in Review
- Mixed news for markets last week, with US President Trump delivering a well-received speech to Congress which suggested he might finally be settling into a more measured “Presidential” style. As a partial counter to this optimism, however, the speech made only a passing reference to fiscal stimulus, which in turn suggested pump-priming the US economy sometime soon does not appear high on his agenda – at least compared to repealing/reforming Obamacare. More critically last week, were a string of hawkish comments from Fed members (including Yellen), which now suggests a March 15 US rate hike is a “done deal” barring surprise weakness in this Friday’s US payrolls report. The upshot of all this news was further strength in stock prices (buoyed by a more Presidential Trump and the Fed’s apparent confidence in the economic outlook), but also an associated lift in the $US (0.4%) and US 10-year bond yields (+14 bps). A firmer $US helped gold and oil prices ease back.
- Closer to home, there was a somewhat stronger than expected bounce back in Q4 GDP (+1.1%) after the shock 0.5% decline in Q3. Although the sustainability of the growth bounce back is questionable (see my upcoming blog this week), the result further entrenched the market view that the RBA is firmly on hold for the foreseeable future, especially given continued strength in Sydney/Melbourne house prices. That said, the local equity market eased back for the second week in a row, with profit taking among mining stocks (despite continued firm iron ore prices!) again a major drag. The $A dropped back a touch reflecting the firmer $US dollar. Other data last week was more mixed, with the downtrend in home building approvals confirmed and a larger than expected fall back in the trade surplus, suggesting net-exports won’t be as positive for growth in the March quarter.
Likely Highlights in the Week Ahead
- The week begins with a regrettable reversion to “Bad Trump”, following his explosive Sunday morning (US time) tweets suggesting former President Obama had him illegally bugged during the Presidential campaign. So far at least, markets have tended to be forgiving of Trump’s erraticism, but with little new on the fiscal stimulus front last week, it remains to be seem whether the market’s tolerance will last. Otherwise, a key focus this week will be the US payrolls report – a solid outcome in line with market expectations (+200K jobs gain) would likely cement a Fed rate hike this month.
- In Australia, the RBA will comfortably leave rates on hold this Tuesday, and likely issue a statement expressing confidence in the economic outlook. A key highlight will be the NAB Business survey on Wednesday, with a focus on whether the surprise surge in the business conditions index in January was sustained. Other data include retail sales (today), and housing finance (Friday)
- The US equity rally looks increasingly over extended with a pull back likely – perhaps due to Fed tightening and/or impatience with Trump’s erraticism and lack of clarity with regard to near-term fiscal stimulus. Equities have enjoyed a “Goldilocks” environment in recent months, with an improving growth and earnings outlook, but a lack of follow through in terms of higher bond yields and the $US. But last week bond yields and the $US dollar started to move higher – so watch this space!
- Locally, a resumption in $US dollar strength could start pushing the $A back down again, while the correction in resource stocks in recent weeks is curious given the continued strength in commodity prices – this could start to present a buying opportunity. Otherwise, although economic growth and earnings remains patchy, the market is unlikely to get much love in terms of stimulus from either the RBA or the Federal Government anytime soon.