The Week in Review
Wall Street inched further ahead last week as generally favourable economic headlines across the global continued. We learnt last week that US small business confidence surged to very high levels, Chinese economic data continued to tick over nicely and US core consumer price inflation remained benign. Washington is also getting closer to finally passing the tax cut package.
The only wrinkle on this otherwise positive outlook was a lift in US producer prices, reflecting the flow through of higher petrol prices and strong price gains in areas such as housing, drugs and cars. This appears the first tangible sign that US inflation pressure may be stirring, which need not kill the equity bull run but would be a bullish sign for the $US and bearish for bonds in 2018. That said, although the Fed lifted rates as widely expected, markets were relieved it kept to plans to only raise rates three times next year (rather than four) – even though it upgraded America’s growth outlook on the back of likely US tax cuts. Importantly, although the Fed now expects stronger growth in 2018 (2.5% rather than 2.1%), it still expects core consumer price inflation to hold just below its 2% target at 1.9%.
Locally, contrary to my fears this time last week, the $A staged a feisty rebound due to a more dovish than feared Fed and solid local economic data. Indeed, employment surged further ahead in November and even consumer confidence lifted. And although the National Australia Bank’s index of business conditions did drop back after an (unusual) spike higher in October, overall sentiment remains at a healthy above-average level. All up, the local economy also appears reasonable, although the failure good employment and business conditions to flow through to wages remains a downside risk for consumer spending and the economy in 2018.
The Week Ahead
All eyes globally will be on Washington again this week as it seems likely that both chambers of Congress will pass the tax cut deal, paving the way for the President’s signature. In Australia, the Mid-Year Economic and Fiscal Outlook (MYEFO) is due Monday, and is expected to show modestly lower budget deficit projections thanks to improved employment and business profits – opening the door for at least a sandwich and a milkshake tax cut from the Government. Minutes from the latest RBA meeting are also released and are expected to show the Bank increasingly encouraged about the economic outlook but still in little hurry to raise rates.
Have a Great Week and good holiday break!
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