Week in Review
It was another roller coaster week across global markets, with the key highlights being testimony by new United States Fed chair Jerome Powell and the Trump tirade with regard to steel tariffs. Equities sold off and both the $A and local bond yields fell. The $US and US bond yields, however, managed to hold up ironically because of safe-haven flows due to US-induced global equity market volatility.
Powell’s initial testimony before Congress was perceived as hawkish by the market, particularly when (in response to a question) he ventured that his outlook for the economy “had strengthened since December”. Powell tried to backtrack a little in his second testimony later in the week, indicating he saw few signs the economy was overheating. All up, it strikes me Powell at this stage still seems happy with the current outlook for Fed policy, namely around three rate rises this year – he’s neither clearly more hawkish or dovish than this predecessor, Janet Yellen.
More disconcerting was US President’s Trump sudden announcement that he intended to impose tariffs on steel imports, which almost immediately sparked retaliatory threats from other economies – notably Europe. How this plays out remains to be seen. At face value, Trump is back to his belligerent best, tweeting trade wars are “easy to win” – and an across the board steel tariff increase followed up by tit-for-tat tariff increases with major trading partners could easily crush global business and investor sentiment and hasten the next global downturn and equity bear market. Even a more contained bout of trade friction might eventually achieve the same result if it leads to a seriously weaker $US and higher US inflation and bond yields. That said, US stocks rebounded on Friday partly due to hopes that Trump was (once again) merely blustering and the actual change in policy will prove quite limited.
Locally, the key highlight was the modestly encouraging Q4 capital expenditure survey, which continued to suggest non-mining investment is finding its feet and will provide a handy new source of growth (albeit not too strong at this stage) over the next year or so. National house prices in February also continued to ease, led by a further cooling in the once red-hot Sydney market.
There are two key highlights globally this week: the fallout from Trump’s tariff tirade and the US February payrolls report on Friday. The European Central Bank and Bank of Japan also meet later in week, with both central banks likely to try to stem upside currency pressures by playing down any risk of policy tightening anytime soon.
With regard to tariffs, one hope is that rumoured “exemptions” to the Trump tariff increases will be quite widespread, meaning any global trade impact will be quite contained. Indeed, Trump has also talked tough with regard to North Korea, with little as yet much follow-up action.
Payrolls on Friday, meanwhile, are a huge event risk for markets – particularly the outcome for average hourly earnings (AHE). Recall it was the larger than expected 0.3% increase in AHE in January that sparked the recent global equity market sell-off. The market consensus is that AHE will rise by a more modest 0.2% in February, allowing the annual rate to ease back to 2.8%. Such is the sensitivity of the market to this number, a higher result (0.3% or more) could potentially have a huge negative impact on Wall Street, to the extent it confirms fears that US labour market tightness is finally leading to a break-out in wage growth (and hence inflation). Though I rarely try to forecast monthly numbers, however, to my mind the risks are probably on the downside with regard to AHE – given that the recent spike in wages partly reflected minimum wage increases in a number of States and volatility in the hiring and firing of (low paid) casual workers due to extreme weather events over recent months. We’ll see!
Locally, the key highlight is Wednesday’s Q4 GDP result – although the RBA does also meet on Tuesday. Although we’re get a few more partial indicators today and tomorrow, at this stage a GDP gain of around 0.5% seems likely, with annual growth slowing from a respectable 2.8% to a more pedestrian 2.5%. While consumer spending appears to have bounced back a little last quarter and business investment and public demand also lifted, housing activity is now becoming a more persistent negative drag and a good chunk of the lift in business investment is spilling over into imports.
Have a Great Week!