The Week in Review
- After a few weeks of consolidation from mid-Dec to mid-Jan following the post-Trump rally, the US S&P 500 US broke out to new record highs above 2280 last week reflecting reassuring earnings reports and an upbeat manufacturing survey. Despite the “risk on” equity gains, the $US index edged lower and the rise in US bond yields was more muted. Friday’s weaker than expected 1.9% (annualised) gain in Q4 US GDP needs to be discounted, due to volatility in soybean (yes that’s right!) exports, which enjoyed a one-off boost in Q3 and fell back to earth in Q4. Importantly, underlying US consumer and business investment were firm in the quarter, rising at around a 2.5% annualised pace each.
- A key take away from Trump’s first week in office is that he’s clearly decisive, intent on hitting the ground running even if you don’t agree with all of his policies. Investors are probably taking heart that this bodes well for his plans to cut taxes and boost infrastructure spending also. So far so good, but this protectionist bent and apparent determination to confront China over the South China seas remain potential flash points.
- Locally, the Q4 consumer price index (CPI) report came in a touch lower than expected, which (to my mind) still leaves the door open for a potential RBA rate cut in May if the next CPI report also fails to show any hint that underlying inflation is lifting from its current rate of 1.5% YOY. Note: the RBA has forecast a rise in core CPI to 2% by the June quarter.
- The local equity market kept up with Wall Street gains last week, helped also by continued strength in iron ore prices. Resources continue to power ahead, while the $A consolidated after rebounding in recent weeks.
Likely Highlights in the Week Ahead
- The Fed meeting over Tuesday-Wednesday will take centre stage early in the week. While no rate hike is expected, the risk is that hawkish rhetoric causes further strength in the $US and higher bond yields, which could in turn pressure equities. January US payrolls on Friday is another key test – employment is expected to rise by a solid 170K, with the unemployment rate steady at 4.7%. A key risk, however, is another strong wages outcome, after strength in December. Further signs of lift in US wages would add to talk that the US economy is already close to full employment and Trump stimulus might be counter-productive and overly inflationary.
- Locally, the January NAB business survey on Tuesday is a highlight. Business sentiment has been in retreat over the latter half of 2016, and signs of consolidation are hoped for. After bouncing in November, Thursday’s December home building approvals report should confirm the downtrend in new activity remains in place. More positively, the local earnings season is starting up, with the outlook for the resources sector especially bright in light of commodity price strength in the past year.
Markets want to rally, inspired by Trump action, firmer oil prices (which is helping revive the US industry) and encouraging earnings reports. Against this is the fact that outright price-earnings valuations are already high and bond yields also remain under upward pressure. A resumption in $US strength – which seems inevitable – could also test US equities. But with commodity prices still firm and the both the US and local earnings season likely to be OK, chances are equities can continue to grind higher.
Have a great week!