The Week in Review
- Opec’s surprisingly forthright deal to cut back on oil production was the major highlight in global markets last week, which contributed to the 12% gain in oil prices. Another solid US payrolls report – broadly in line with market expectations – rounded out the week, and kept expectations for a Fed rate next week firmly in tact.
- Noteworthy was the fact the America’s unemployment rate sunk to a 9-year low of 4.6%, yet average hourly earnings slipped back 0.1% – which allayed fears (perhaps only temporarily) that America’s tight labour market was leading to a uncomfortable pick up in wage growth.
- As suggested last week, the other theme last week was consolidation/profit taking on the popular “Trumps trades” of recent weeks, with the S&P 500 and the $US easing back. That said, bond yields still edged higher and gold dipped further.
- In Australia, the local listed property sector lost further ground (with investors seemingly now favouring banks for yield) while resource stocks saw profit taking. The Q3 capital spending report was downbeat, confirming a likely weak read for business investment in this week’s Q3 GDP report, as well as revealing a modest downgrade to the already quite weak business investment outlook for this financial year. The failure to see much uplift in the non-mining investment outlook is the biggest disappointment, and its hard to see rate hikes anytime soon in this environment! On a more positive note, retail sales in October surprised on the upside with a 0.5% gain – suggesting consumers are staging a bounce back after a weak Q2.
Likely Highlights in the Week Ahead
- In the absence of key global data (and the fact this month’s US Fed rake hike is now all but certain), the outcome of the Italian referendum may dominate market thinking at least early in the week. A the time of writing it appears that the “No” vote has prevailed, and PM Renzi has just announced he will resign tomorrow. This could usher in another period of political instability ahead of fresh elections in 2017 – where, in turn, there is a big risk of anti-EU populist parties gaining power. All up, Italian worries are a negative for the Euro, and add to the case for $US strength. It is very unlikely European worries, however, could get bad enough to dissuade the Fed from hiking next week.
- Locally, the RBA meets on Tuesday with no move likely and a fairly boring “boiler plate” statement expected. Of more interest will be whether the Q3 GDP report on Wednesday produces a negative outcome – as some in the market think. For the record, the consensus bet is a small 0.2% gain, dragging down annual growth from 3.3% to 2.5%. All up, this week’s result is likely to remind us growth is still fairly sluggish, with one-off factors (lumpy public spending in Q2 and a weather-related bounce back in resource exports in Q1) overly flattering growth in H1’16. By contrast, Q3 has been hurt by slumps in both housing and business investment, and flat growth in retail sales.
- Europe and Australian GDP are the highlights this week. All up, these are likely to be US dollar supportive in their own ways. We might also expect further equity market consolidation as Trump euphoria fades and markets focus on the imminent Fed rate hike.
Have a great week!