Week in Review
The highlight of the past week was the sell-off in global equities, which seemed a delayed reaction to the surge in US bond yields one week earlier. As it turned out, US bond yields eased back somewhat last week as the “risk-off” trade took its toll on equities. The $US has largely moved sideways through the mayhem, with gold catching a small “flight to safety” bid. Local stocks sold off also, with the S&P/ASX 200 Index dropping back below 6000.
Note there were few new fundamental drivers of last week’s equity sell-off, with the US CPI result actually surprising to the downside (with core annual inflation holding at 2.2%). Even Trump’s latest incendiary comment that the Fed “was out of control” did not shock the market – which has learned to take what he says with a grain of salt. Not helping is the fact that the US and China seem no closer to a trade deal, but this has been the case for sometime.
As I’ve previously argued, I reckon China has called Trump’s bluff and seems prepared to wear the tariff increases rather than be forced to the negotiating table. Meanwhile, the sell-off in equities and some murmuring from corporate America that tariff increases are raising their costs might serve to remind Trump that trade wars are not costless and “easy to win”. Either way, attention is now turning to next month’s G-20 meeting, where the US and China may well try to resolve their dispute to avoid the steep US tariff increases that Trump has threatened will take effect in early-2019.
In Australia, local economic data was somewhat mixed, with the NAB index of business conditions edging up to remain at healthy levels, though the ANZ index of job advertisements fell for the second month in a row and home loan approvals also retreated further. The big questions going forward are whether the economy, which at present appears in good health, can withstand the looming downturn in housing construction, and whether the ongoing decline in Sydney/Melbourne house prices will undermine still fragile consumer spending. It’s an environment in which the RBA is likely to remain firmly on hold, suggesting it’s perhaps only a matter of time before the $A breaks below US70c.
A key focus this week will be whether both US bond yields and equities can stabilise. Given the market’s sensitivity to interest rates, minutes from the recent Fed meeting will get great scrutiny mid-week, though they are unlikely to change the view that the Fed remains intent on raising rates again in December and several more times in 2019. The other key event will be the Q3 US earnings reporting season, which kicked off positively last Friday with good results from US banks. At face value, the latest earnings season should also produce strong results, through one concern is the extent to which companies warn about the impact of higher tariffs and trade uncertainty. Broader evidence of labour costs pressures would also be a negative.
In Australia, the September labour market report on Thursday seems likely to show ongoing solid growth in employment and a possible further drop in the unemployment rate to 5.2%. If so, talk of the unemployment rate hitting 5.0% by Xmas – well ahead of the RBA’s latest forecast – would grow, though even this seems unlikely to sway thinking over when the RBA will raise rates.
Have a Great Week!