Global Review & Outlook
- While Trump’s away markets will play. The S&P 500 touched a new record high last week, as attention re-focused on the otherwise encouraging market backdrop following the previous week’s political uncertainty. Critically, the Fed minutes suggested that while a June rate hike remained more likely than not, the market was reassured by the fact the Fed remained very conscious of the need to remove stimulus gradually. A modest upgrade to annualised Q1 GDP growth (from 0.7% to 1.2%) also helped sentiment. As suggested last week, Opec’s deal to extend production cuts was no better than expected, causing oil prices to give ground after the announcement.
- A key highlight this week will be US May payrolls, with employment growth of 180K expected and the unemployment rate steady at 4.4% – another firm employment report would only further entrench the case for Fed tightening in mid-June, which should be $US supportive. Another increasingly important payrolls indicator to watch is average hourly earnings – the market would love reassurance that, despite the tightening labour market, wage growth is still relatively well contained.
- Meanwhile, with President Trump back on US soil this week this week, nervousness over the Comey/Russia saga may become a renewed source of market attention. President T is already tweeting up a storm, decrying recent revelations over Russia links as “fake news”.
Australian Review & Outlook
- The S&P/ASX 200 lagged global markets last week, as lingering concerns over the bank levy and the sluggish state of the economy weighed on investors. As regards the economy, a weaker-than-expected 1.7% decline in Q1 residential construction – along with already known weakness in retail sales – suggests Q1 GDP is shaping up to be very soft. We’ll know more when key business investment data is released on Thursday, though this is a likely to show mining investment still falling (though at a reduced rate) and non-mining investment still weak. Other key data this week include building approvals and retail sales on Tuesday and Thursday respectively.
- The weakness in home building last quarter was a surprise to many as, despite the already established downtrend in home building approvals, the hope was that a backlog of high-rise apartment projects yet to be done would hold up activity for some time yet. By contrast, my concern has long been that this “pipeline” of activity won’t be as supportive as generally hoped, especially if many approved projects are cancelled as fear of high-rise over supply fears mount.
- Trump’s overseas trip allowed markets to turn their attention from politics for at least a week, though the question now is whether political concerns will re-surface given he’s back in Washington. As I outlined last week, the likelihood of Trump actually being removed from office – such as through impeachment – seems very low, though the concern is that his immediate political difficulties could undermine his desire to deliver tax cuts and fiscal stimulus. Despite this, the US economy is still humming along, the Fed remains very cautious, and US earnings – especially in the tech sector – are growing nicely. The Japanese and European economies are also doing reasonably well, with growing scope for potential out performanceespecially if the $US strengthens further.
- Closer to home, local fundamentals don’t appear as bright. Indeed, the market is again flirting with the idea of an RBA rate cut, especially if decent signs of slowing in the Sydney and Melbourne property markets emerge. As a result yield, rather than growth, investment themes are likely to remain favoured locally – which will tend to favour financials (over say, bond proxies like listed property) if longer-term bond yields do start to rise due to global factors.
Have a great week!