Bassanese Bites | 21 August 2017 | The central bankers that did not bark

The central bankers that did not bark

BY David Bassanese | 28 August 2017
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global Australian markets chart August 28

Global Markets Review & Outlook

It was yet again other generally quiet week across global financial markets, with many investors waiting on end-week comments from both Yellen and Draghi at the Jackson Hole Conference.

But before the central bankers go a chance to speak, press rumours that Trump continues to work on a tax plan buoyed markets on Tuesday, only for this risk-on sentiment to be unwound on Wednesday following his threat to veto spending bills (which are necessary to avoid a government shutdown) unless they include funding for his Mexican Wall. It was a case of what President Donald Trump first giveth he can surely taketh away.

Adding to the angst, last week also saw renewed investor focus on Congress’s need to raise the debt ceiling in coming months – with rating agency Fitch warning of a sovereign credit downgrade if there’s a protracted delay. Despite the politics, meanwhile, US economic data remained generally solid – with the service sector PMI especially strong in August.

As for the central bankers, what was not said turned out to be more important for markets. Yellen’s failure to mention monetary policy was taken as sign that she’s not uncomfortable with the market’s relatively low (around 40%) probability of a December rate hike – which saw that probability ease further, pushing down bond yields and the $US also. As for Draghi, his failure to talk down the Euro was taken as a sign of his apparent comfort with currency strength – which pushed the Euro up further!

To my mind, markets are probably right in their assessment of Yellen – she is equivocal on the need to hike rates again this year given that inflation has eased back in recent months. But the market’s assessment of Draghi seemed overly hawkish – after all. up until a week ago, he was widely expected to use the speech to signal a tapering in bond purchase by early next year. The fact he backed away from that expectation did in fact reflect the ECB’s concerns over the Euro. All up, the failure of both of the world’s top two central bankers to bark last week is a sign that global monetary conditions are likely to remain very easy for an extended period – which is bullish for equity markets!

Markets are likely to remain focused on US Government shutdown risks this week, with another likely solid US payrolls report due on Friday.

Australian Market Review & Outlook

With little local economic data last week, the market took its lead from global developments and the ongoing patchy local earnings reporting season. The S&P/ASX 200 stayed within the remarkably narrow range around 5,700 that has been evident for the past few months.

That said, with global central bankers remaining dovish and iron ore prices still firm, the $A is holding above its recent breakout level of US 78c.

There will be more interesting local data to digest this week, with building approvals, house prices, construction activity and the capital spending survey the main highlights. In general construction and business investment (building blocks for Q2 GDP) are likely to show strength, especially after poor weather held back some activity in the March quarter. A softening in auction clearance rates also suggests we’ll see some moderation in Sydney house price growth in August, though building approvals should confirm their downtrend after a surprisingly strong bounce in July.

Have a great week!

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