Global equities pushed higher again last week reflecting encouraging US economic data and earnings results, along with hopes this week of both renewed US-China trade talks and a Fed rate cut. Washington also called a truce on the annual US budget fight, with debt ceiling provisions suspended for 2 years. Trump also hosed down talk of any possible US currency intervention.
According to FactSet, 77% of the 44% of S&P 500 companies that have reported so far beat Q2 market earnings expectations, which is modestly above the 5-year average of 72%. Even so, earnings are still expected to decline by 2.6% on year-ago levels, though that’s a bit better than the 3.4% decline expected last week.
The US economy also grew by a slightly better than expected 2.1% (annual rate) in Q2, powered by a strong rebound in consumer spending, after the government shutdown hurting spending in Q1. If you want to worry, note business and housing investment were weaker, and lingering trade tensions do appear to have caused near-recessionary conditions in global manufacturing (Asia and Europe especially). But US manufacturing overall is still growing and the global services sector is still holding up fairly well.
This week the Fed, trade talks, earnings and US payrolls will be the focus. While some in the market are still clinging to hopes the Fed will cut by 0.5% this week, a smaller 0.25% move is much more likely. I also anticipate the Fed will try to signal retention of at least a modest easing bias, leaving markets to hope for at least one or two more rate cuts later this year. While we can always hope, I expect little news to come from the latest US-China trade talks, other than an agreement to “keep talking”. US payrolls should show continued solid employment growth and contained wage inflation. The earnings season will also roll on, with the usual smattering of hits and misses.
Although US equity valuations are looking stretched (with the S&P 500’s price-to-forward earnings ratio at 17, or jut below last year’s peak of 18) the reality is that central banks are bringing back the punch bowl late into the night and equities can’t help but party on.
Pushed along by global stocks and intensifying local rate cut hopes, local equities finally touched new record highs last week, while bond yields made new record lows. Indeed, several more economists came around to my view that the RBA will likely cut rates to 0.5% by early 2020 – supported by a speech by RBA Governor Phillip Lowe, in which he strongly defended the current inflation targeting system. To my mind, the RBA – like many other central banks – are wrongly fighting the last war, but until they change their mind as investors we can only deal with the bullish facts on the ground this environment creates.
Local highlights this week include Wednesday’s CPI report, which should show underlying inflation still stubbornly below the RBA’s 2 to 3% target band. Other data should be mixed, with building approvals on Tuesday likely to weaken further and retail sales on Friday likely to be still subdued. That said, Core-Logic may well confirm that national house prices by July were starting to stabilise after a two-year slump.
Have a Great Week!