The Week in Review
- As noted last week, only one of the three more obvious global macro “Trump trades” is working at present, as equities continue to grind higher while bond yields and the $US dollar mark time in an extended “pullback” period. Indeed, US 10-year bond yields dropped to the lower edge of their 2.3-2.6% “consolidation” zone last week, despite hawkish Fed minutes suggesting a March rate hike was not out of the question. Doubts over the size and timing of Trump’s fiscal stimulus plans (US Treasury Secretary Mnuchin seemed to downplay any near-term boost to growth in an interview last week) plus jitters over the upcoming French Presidential election appear to be weighing on yields. The $US was flat which, together with European jitters, was enough to give gold added allure.
- Locally, the news was mixed. RBA Governor Lowe remained upbeat in commentary, suggesting even further low CPI reports won’t bring forth a rate cut anytime soon. Meanwhile, the Q4 business investment and construction data was disappointing, suggesting only a modest bounce back in economic growth is likely when GDP result are released this Wednesday. Also mixed were the remnants of the earnings reporting season, which has produced bumper mining sector results (as expected) though patchy performance elsewhere. Of course, iron ore continued to stupefy analysts (myself included) by pushing ever higher, while oil prices – despite OPEC’s production cut holding – are struggling to rally further due to ample US inventories and signs of revival in US supply.
Likely Highlights in the Week Ahead
- The major global highlight this week will be Trump’s speech before a joint sitting of the US Congress. Market hopes are that he will outline more of his fiscal stimulus plans. Otherwise, we can expect increasing focus on the late-April French Presidential election, with most conceding the National Front’s Marine Le Penn is likely to win the first round, but not the critical second round.
- In Australia, focus will be on Wednesday’s GDP result, which at this stage looks like being underwhelming (though we get more news on the net export, inventories and business profits contributions today and tomorrow). Consensus is looking for a 0.7% quarterly gain, after a 0.5% slump in Q3 – which would drag annual growth down to 1.9%. That’s a big miss from what the RBA was expecting only a few months ago!
- Global markets are currently enjoying what we might call a “Goldilocks” environment, with an improving growth and earnings outlook while, at least of late, a lack of follow though in terms of higher bond yields and the US dollar. Either way, Trump’s speech this week could be the catalyst for the start of an overdue pullback in stocks. If he outlines a big stimulus plan, it could be a case of “buy the rumour/sell the fact” especially if that leads to renewed upside in bond yields and the $US. If he disappoints, moreover, stocks could also take a hit.
- Locally, a bullish RBA stands in marked contrast to the much more mixed “facts on the ground” with regard to the economy. The upbeat NAB business survey and steady unemployment rate are positive signs – as are continued firmness in iron ore prices – but actual business and consumer spending data remain soft. A distracted Federal Government, meanwhile, seems unlikely to unleash the infrastructure-led stimulus program the RBA says we need and can afford.
Have a great week!