Worries about Trump could be with us for a while: Shane Oliver
GUEST OBSERVER
Trump jitters dominated markets over the last week with his 90 day travel ban and reports of belligerent phone conversations with various country leaders (including Australia’s) and attacks on allies like Germany adding to concerns about inexperience and political and trade risk.
So despite pretty good global economic and profit news, this saw most share markets dip and bond yields fall. Trump jitters along with a still gradual Fed also weighed on the $US which combined with news of a record trade surplus saw the $A rise.
Worries about Trump could be with us for a while yet as his belligerent approach, his team’s inexperience and fears about trade wars and US isolationism could dominate the pro-growth positives for a while as it will take time to push through deregulation, tax cuts and increased infrastructure spending.
While most of the global political focus has been on Donald Trump, Eurozone political risks will also feature this year. High on the list is France which has presidential elections in April and May. Polling continues to show that populist Eurosceptic Marine Le Pen will make it into the second round polling more than any other candidate at around 27 percent, but that the independent former economy minister Emmanuel Macron (polling at 23 percent) or the Republican party’s Francois Fillon (polling 20 percent) will defeat her in the second round (at 65 percent to 35 percent and 59 percent to 41 percent respectively).
Both Macron and Fillon are pro Europe and reform oriented but Fillon has been hit by a scandal involving the employment of his wife and children as parliamentary assistants (which is legal but the issue is whether they actually worked). Whether its Macron or Fillon who makes the second round against Le Pen, it looks unlikely Le Pen will win the final round. But then again there is still several months to go and of course last year’s Brexit and Trump “upsets” can’t be ignored. As a result investors will worry about it and so French bond yields have been rising against German yields.
The 0.8 percent fall in Australian shares in January is not so positive in terms of the January barometer, which states that “as goes January so goes the year”. That said negative Januarys are less reliable a guide to the year as a whole than positive Januarys. Just recall last year! Since 1980 a negative January in Australian shares has gone on to a negative year only 31 percent of the time. Perhaps more importantly – given it impact on the direction of global and Australian shares – the US share market rose in January by 1.8 percent & since 1980 a positive US January has gone on to a positive year 86 percent of the time.
Major global economic events and implication
Looking globally, business conditions PMIs continued to improve in January pointing to stronger global growth. Very different to a year ago when PMIs were heading down.
US economic data was strong with a further rise in ISM manufacturing conditions index, strong home price gains, solid consumer confidence and growth in personal spending, strong jobs data and a rise in pending home sales. That said wages growth according to the employment cost index remains modest and inflation according the core personal consumption deflator remains stuck around the same levels it’s been at for a year.
The Federal Reserve upgraded its comments regarding current conditions in the economy but there were no changes to the outlook and it continues to see interest rate hikes as being gradual. There was nothing pointing to a rate hike at its March meeting. We continue to anticipate three Fed rate hikes this year with the first being in May or June.
Over half of US S&P 500 companies have now reported with 75 percent beating earnings expectations and 50 percent beating on revenue. Earnings are now expected to be up 5.6 percent from a year ago taking them to a new high, highlighting that the earnings recession that began in 2014 is long over.
Eurozone economic data was also solid with a pick-up in December quarter GDP growth and confidence and manufacturing conditions PMIs at five and a half year highs. While headline inflation rose solidly in December on the back of higher energy prices, core inflation remains stuck at 0.9 percent year on year suggesting that the ECB won’t be rushing just yet to taper its quantitative easing program.
Japanese jobs data was good with stronger than expected readings for household spending and industrial production. Meanwhile the BoJ left monetary policy on hold as expected.
Chinese manufacturing conditions PMIs fell in January but services conditions rose slightly, which points to continued solid growth into early this year.
Indian GDP rose 7.9 percent in 2016 and the Indian manufacturing conditions PMI bounced back suggesting the negative impact of demonetisation may be fading.
Australian economic events and implications
Australian data was a mixed bag. The NAB business survey showed strong business conditions in December adding to confidence that growth bounced back in the December quarter and the surge in iron ore and coal prices drove the trade balance to a record surplus in December. Against this though building approvals slipped further adding to evidence that they have peaked.
While the surge in commodity prices and the associated boost to national income won’t provide the same boost to the economy seen last decade (as tax cuts are less likely due to tougher budgetary conditions, the mining investment boom has already happened and its likely to be less durable) its better than falling national income and will provide some offset to the loss of momentum in dwelling construction.
Meanwhile, a continuing surge in credit growth to property investors in December and a strong start to the year in home price growth adds to concerns that the Sydney and Melbourne property markets remain too hot. If the RBA is to retain the necessary flexibility to cut interest rates again, another round of macro-prudential tightening by APRA is likely to be needed – perhaps lowering the 10% year on year growth threshold for the stock of property investor loans to say 7 percent.
What to watch over the next week?
In the US, apart from what President Trump may do, the main focus in the week ahead will be on December quarter earnings reports with over 100 major companies due to report. On the data front it will be pretty quiet with December trade data (Tuesday) expected to show an unchanged deficit and consumer sentiment and import price data due Friday.
Chinese trade data for January is expected to show a strengthening in import growth to around 5% year on year and a return to positive growth for exports at around 2 percent yoy.
In Australia, the focus will be back on the RBA (Tuesday) but it’s unlikely to make any changes to interest rates.
While the low September quarter inflation reading leaves the door wide open for another rate cut a move on Tuesday is unlikely as the inflation outcome was in line with the RBA’s own forecast and its likely to want to monitor the recent uptick in lending to property investors and see how the economy performs after its September quarter slump.
As a result all eyes will be on the post meeting Statement and the Statement on Monetary Policy to be released Friday.
Of most interest will be any revisions to the RBA’s forecasts, where we expect a downwards revision to the growth forecasts following the September quarter growth contraction and a possible pushing out in the return of inflation to target. Our assessment remains that - with record low wages growth, ongoing spare capacity, an
increasing risk that low inflation will feed on itself and the $A remaining too high - the RBA will cut rates again around May. Also of interest will be what the RBA has to say about the resurgent Sydney and Melbourne property markets – are they embarking on another round of discussions with APRA?
On the data front in Australia, expect a 0.2 percent rise in December retail sales and a 0.8 percent rise in retail sales volumes for the December quarter (Monday) and 0.5 percent rise in December housing finance (Friday) again driven by property investors.
The Australian December half profit reporting season will start to ramp up with 16 major companies reporting (including Rio, AMP, NewsCorp and Suncorp).
Steady earnings upgrades for resources stocks on the back of the rise in commodity prices has seen the consensus expectation for 2016-17 earnings growth rise to 17 percent from around 7 percent last September. Resource company profits are expected to more than double, but profit growth across the rest of the market is likely to be around 5 percent led by retailers, utilities, telcos and building materials companies. Key themes are likely to be: a massive turnaround for resources companies; constrained revenue growth for industrials; continuing constrained revenue growth for the banks; and an ongoing focus on dividends.
Outlook for markets
A further short term consolidation or correction in shares is likely as sentiment towards them remains very high, Trump related uncertainty will be with us for a while and as we enter the seasonally weaker month of February. However, we see share markets trending higher over the next 12 months helped by okay valuations, continuing easy global monetary conditions, fiscal stimulus in the US, some acceleration in global growth and rising profits.
Still low yields and capital losses from a gradual rise in bond yields are likely to see low returns from bonds. Australian bonds are preferred to global bonds reflecting higher yields and as the RBA remains well behind the US in moving into a tightening cycle.
Commercial property and infrastructure are likely to continue benefitting from the ongoing search by investors for yield, but this demand will wane as bond yields trend higher over the medium term.
National capital city residential property price gains are expected to slow to around 3-4 percent this year, as the heat comes out of the Sydney and Melbourne markets and rising apartment supply hits.
Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.5 percent.
SHANE OLIVER is head of investment strategy and economics and chief economist at AMP Capital and is responsible for AMP Capital's diversified investment funds.
