Week in Review
US stocks ended flat over the past week reflecting a tug-of-war between ongoing good earnings reports and a rise in bond yields and inflation concerns. On the positive side, the US earnings reporting season continues to shoot the lights out, with key tech stocks in particular like Facebook, Amazon and Google proving their worth. On the negative side, US 10-year bond yields finally cracked the 3% ceiling – and touched 3.03% at one point – though ended the week at 2.96%.
US economic data remained upbeat, with Q1 GDP proving a bit better than expected. Of most note last week, however, were readings on US inflation, with the Q1 core consumption deflator lifting at a 2.5% annualised pace, although still up only 1.6% over the year. The US employment cost index rose a slightly stronger than expected 0.8% to be up 2.7% over the year. Private sector wages have lifted by 2.9% over the year. As seen in the chart below, it’s still fair to say US wage pressures are only gradually rising, and still from fairly low levels – though the trajectory, if it continues, would eventually pose a problem for bond and equity markets.
Reflecting rising US bond yields, and recent softer data in Europe and Japan, the $US has started to lift of late, which in turn has helped push down the $A. The $A has recently broken below its uptrend support line from its lows in early 2016 – and a break below US75c would be suggest a change in trend. My $A year-end target remains around US73c.
Last week’s local Q1 CPI report revealed core inflation has finally lifted to the lower edge of the RBA’s 2 to 3% target band.
The US earnings vs. interest rates tug-of-war is likely to remain a feature this week. As regards earnings, another tech bellwether – Apple – reports this week. As regards inflation and interest rates, watch out for the monthly (March) read on the core consumer deflator tonight, which is expected to show annual inflation lifting to 2% from 1.6% as unusually low readings from last year drop out of the calculations. Another highlight will be US payrolls on Friday and, in particular, the average hourly earnings (AHE) number given emerging concerns about the wage and price outlook. As it stands, the market expects annual growth in AHE to hold steady at 2.7%. Although the Fed also meets this week, markets are convinced the Fed will next move in June. That said, the market will be on guard for any hint in this week’s commentary that the Fed is thinking about more than two further rate rises this year.
In Australia, the RBA also meets (Tuesday) and releases its quarterly Statement on Monetary Policy on Friday. I anticipate the Bank will shave its 2018 GDP growth forecast from 3.25% to 3%, boosting its underlying inflation forecast for year-end from 1.75% to 2%. With underling inflation now at least touching the RBA’s 2 to 3% target band, there’s a growing risk the RBA could lift rates later this year – especially if the $A breaks down further, and provided the trend in unemployment does not turn upward.
Have a Great Week!