Week in Review
Despite all the bluster from Donald Trump, it was a “risk-on” week for global markets, with the S&P 500 lifting by 1.7% since this time last Monday. The Index has now lifted by 7.8% since its low on February 8, to be off only 3.2% from its January 26 high. Bond yields also rose and the $US eased. Fading Italian concerns were one positive factor, with new Prime Minister Giuseppe Conte outlining he wants to both boost the budget deficit and stay within the EU – a clear headache for Europe, but not necessarily for global financial markets. A report that China had offered to import $US70 billion worth of US goods to head off a tariff war was also greeted positively, though whether this was merely “fake news” remains to be seen. Data wise, the US economy remained rock solid with a strong non-manufacturing ISM report, though lingering concerns over Europe persisted with a further 2.5% drop in German factory orders. The G-7 meeting came and went and, despite the theatrics, produced nothing much of a consequence for global markets to either fear or celebrate.
In Australia, the clear highlight was stronger than expected March quarter GDP result. GDP rose 1%, lifting annual growth to a respectable 3.1% from 2.4% in the December quarter. Strength in business investment and exports were the major positive factors, while tepid consumer spending was the major drag. Overall, while the result seems to confirm that non-mining business investment (especially in the healthcare sector), infrastructure and exports should continue to support growth, lingering worries remain over consumer spending (given weak wages growth, high debts and slowing employment growth) and the intensifying downturn in housing construction. All up, there remain enough question marks over the growth and inflation outlook to keep the RBA sidelined for a while longer.
The US-North Korean meeting will naturally be a focus of attention at the start of this week, though a market neutral agreement to “keep talking” seems the most likely outcome at this stage. Otherwise, focus will quickly switch to the US Federal Reserve’s two-meeting, where it’s virtually certain rates will be raised a further 0.25% to a 1.75-2% range (Thursday morning Australian time). Of even more interest, however, will be the Fed’s commentary and the year-end median projection for rates among voting-Fed members – otherwise known as the “dot plot.” As seen in the last “dot plot” released in March, the median-expectation was a year-end Fed funds rate of between 2 to 2.25%, implying only one further rate hike remain this year after this week’s expected move. Although the market is hotly debating whether this median expectation will hold, my base case is that, at this stage at least, it will. If I’m right, we could expect a relief rally in US stocks and further easing back in bond yields and the $US.
In Europe, the ECB meeting will also be of interest, given recent hints from its Chief Economist that it will formally discuss when to conclude its current bond buying program. Currently, the ECB is buying €30 billion worth of EU bonds per month, which is “intended to run until the end of September 2018, or beyond, if necessary,…” Although higher oil prices have lifted headline EU inflation of late, recent Italian concerns and signs of slowing European growth suggest to me the ECB will (again) announce nothing this month – disappointing Euro bulls hoping for a quicker move to policy tightening.
In Australia, we’ll get useful updates on business and consumer confidence, home lending and employment. The National Australia Bank business survey due today is likely to show overall business conditions and confidence remain robust, while housing finance will show further steam is coming out of the market, particularly among investors. Tomorrow’s Westpac consumer confidence report should again show households are more cautious than business (reflecting weaker wages relative to profits!). And while employment growth is likely to remain robust in Thursday’s report, strong population growth and rising labour force participation could keep the unemployment rate at the frustratingly high rate of 5.6%. Indeed, having touched a low of 5.4% late last year, the unemployment rate has (worryingly) been edging gradually higher in recent months.
Have Great Week!