Global Review and Outlook
- Trump troubles dominated markets last week and contributed to further weakness in stocks, bond yields and the $US – and a rebound in gold. Specifically, the appointment of a special prosecutor to investigate Russia-Trump administration links suggests this saga will drag on further. What’s more, there are now revelations Trump may have pressured ex-FBI head James Comey to drop the Russia investigation, which if proven could be construed as an obstruction of justice – an impeachable offence. Ominously, reports indicate Comey has agreed to testify in public before a Senate Committee “sometime after memorial day”, which is next Monday, May 29. That suggests testimony next week is highly likely.
- In other news, oil prices bounced nicely in anticipation of a widely expected decision by Opec to extend its production cut agreement at its official meeting this Thursday. There’s even a hint (hope?) that Opec could announce a deeper cut, given an extension is only anticipated to bring global oil inventories back into line with their 5-year average. Barring a surprise deeper cut, therefore, there seems some risk of an oil price correction after Thursday, if only because the extension announcement is already so well anticipated – a classic case of buy the rumour, sell the fact.
- US economic data meanwhile remained generally firm last week with declines in jobless claims and a strong manufacturing data, such that the market still sees a June Fed rate as a very high risk. There are more Fed speakers this week and minutes to the Fed’s May meeting are released on Wednesday – though it seems unlikely the tone of this commentary, or other US economic data this week, will significantly shift market expectations regarding a June move. A greater risk to a June move would be heightened market volatility should we get further bombshells out of Washington.
Australian Review and Outlook
- The key highlight locally last week was the better than expected April employment report, with the unemployment rate dropping back from 5.9% to 5.7%. That said, all of the gain in employment was part-time – which contributes to the concern that the quality of jobs growth is not great, and ample spare capacity remains in the labour market. Labour market softness was also evident in the weak 0.5% quarterly gain (1.9% over the year) in the wage cost index reported last week.
- Somewhat disappointing also was the 1.1% decline in Westpac’s consumer confidence index in May – despite promises of more spending in the May Federal Budget released only a few days earlier. This suggests households are more concerned with the drumbeat of news warning of a house price bubble – from an excitable media, perhaps desperate for headlines. In a key risk to the RBA and Government’s forecasts, retail sales so far this year have been fairly soft.
- The only key data locally this week will be Q1 construction activity, a key focus of which will be the degree to which housing construction is holding up despite the decline in building approvals over the past year. The RBA has been assuring us that there’s a large “pipeline” of home building still to be done that should hold up the sector for some time yet – we’ll see, as I have my doubts!
- The so-called Trump Trade as evolved into the Trump Fade in recent weeks, as concerns Trump could be distracted – or even prevented from – pursuing fiscal stimulus has seen bond yields, equities and the $US decline. Despite this, the US economy is still humming along, with expectations that Q2 GDP growth will be quite reasonable (2-3% annualised) after weak 0.7% annualised growth in Q1. Accordingly, a June Fed rate hike still seems more likely than not.
- Fundamentally, irrespective of whether Trump stimulus goes forward, the case for higher bond yields, $US and equities remains in place – given ongoing growth in the US economy and good corporate earnings. Nearer-term, however, political events are likely to dominate – with more bombshells seemingly more likely than not.Have a great week!