The Week in Review
It was another strong week for global equity markets thanks to ongoing good economic data across a range of countries and a solid start to the US Q4 earnings reporting season. The IMF’s upgrade to global growth forecasts and Washington’s deal to avert – or at least delay – and extended US Government shutdown also helped bolster sentiment. Perhaps remarkably, bond yields were broadly unchanged and the $US slipped further – the latter not helped by comments from US Treasury Secretary Mnuchin in support for a weaker greenback.
Locally it was a relatively quiet week on the data front, though stocks were dragged higher by the unbridled global optimism. Reflecting $US weakness and growing confidence around global growth and commodity prices, the $A also lurched higher and is getting closer to what appears an important technical test at around US82c.
The Week Ahead
The onward march of the US earnings reporting season will remain an important theme this week, with solid US growth and contained costs suggesting the results are likely to remain impressive. Key Nasdaq-100 tech darlings such as Facebook, Apple, Amazon and Alphabet report mid-week. Importantly, US companies are enjoying both strong top line (i.e. sales) and bottom line (i.e. earnings) results and earnings expectation for Q1 2018 are also being revised up. With tax cuts now bedded down, another theme that may well start to emerge in the US is “infrastructure spending” with President Trump expected to talk up big spending plans in Tuesday’s State of the Union Address.
Although the Fed also meets this week, no change is expected, though its commentary is likely to support the market’s growing conviction (70% probability) that it will hike rates in March. As was the case in December, US payrolls on Friday are likely to reveal another sub-200k employment gain, owing to growing labour shortages and a harsher than usual winter season. That said, the market will remain alert to any further drop in the unemployment rate and/or lift in wages growth – given their potential inflationary consequences.
In Australia, the key highlight will be Wednesday’s Q4 CPI report, which is likely reveal still fairly muted inflation pressures such that annual underlying inflation will remain just a touch under the RBA’s 2 to 3% target band. In itself, however, that nonetheless suggests inflation is at least high enough for the RBA not to need to persist with the current very low level of interest rates – especially also given broad strength in the economy. Countering this view, however, is the still uncomfortably high $A, tottering Sydney house prices, and an increasingly vulnerable consumer outlook. The RBA will have a tough job deciding what to do in the months ahead!
Have a Great Week!