More of the same over the past week with mixed news on profits, nervousness over the US “fiscal cliff” and no resolution regarding Spain and Greece seeing the correction in global shares continue. The good news is that credit markets haven’t confirmed the weakness in shares and nor has the $A which has remained strong.
> November 1 will mark the fifth anniversary of the peak of the Australian share market prior to the onset of the GFC. With the market peaking at 6854 for the All Ords in 2007 and currently running around 4500, having fallen to a low of 3112 in 2009, average returns have obviously been abysmal over the last five years as a whole. The annualised change in the All Ords over the past five years has been -7.7% pa. Including dividends this improves but only to a still poor -3.3% pa. The good news is that it rarely gets worse than this, with the only exception being the mid 1970s. After similar periods of weakness in the past, returns over the subsequent five years have been solid.
Major global economic releases and implications
> US economic data was mixed with September quarter GDP growth coming in stronger than expected at 2% annualised, the Markit manufacturing PMI rising slightly, new home sales continuing to trend up but pending home sales rising less than expected, initial jobless claims falling and durable goods orders up strongly but masking softness in capital spending. There was little new from the Fed with it continuing to characterise growth as moderate. So the clear message is that open ended quantitative easing will continue and the December Fed meeting will be watched to see whether the end of operation twist will be replaced with even more bond buying.
> The US earnings reporting season is more than half complete. The good news is that 63% of companies have come in better than expected in terms of bottom line earnings and earnings growth is likely to come in flat up from a consensus of down 2% a month ago. The bad news is that several big companies have missed, eg Apple and Amazon, less than 40% of companies are beating on revenue and outlook statements remain poor so profit growth expectations are being revised down. Earnings normally lag economic growth and so should start to improve over the year ahead if economic growth picks up a bit. Earnings reporting seasons elsewhere have been similarly messy with beats and misses roughly equal in Asia but slightly more beats than misses in Europe.
> Euro-zone manufacturing PMIs slipped in October but remained in the range they have been in for the last six months at a level which is consistent with roughly a 1% contraction in GDP this year. It doesn’t appear to be getting any worse, but there is no sign of improvement either. What’s more private lending is still contracting. The ECB has done well to stabilize borrowing costs in Spain and Italy, but still needs to ease overall monetary policy further. This is particularly so with German business conditions continuing to soften. In the UK GDP grew 1% in
the September quarter, helped by a rebound from the Jubilee holiday and a boost from the Olympics.
// 2
> Japan remains in stuck in deflation highlighting the need for more aggressive BoJ easing. The Government announced more fiscal stimulus but it’s not sustainable given Japan’s huge budget deficit and public debt.
> China’s HSBC flash manufacturing PMI rose in October adding to evidence China may be bottoming. Korean GDP rose just 0.2% in the September quarter. Fortunately stronger Korean exports over the first 20 days of October are a positive sign and policy stimulus should drive stronger domestic demand in the year ahead. Australian economic releases and implications
> The mid year budget review in Australia was a bit of a non-event at a big picture level with only a relatively mild downgrade to revenue expectations flowing from the mining slowdown meaning that budget savings only needed to be relatively minor in order to maintain the projected surplus. Our concern is that the full extent of the deterioration in the budget is understated. The Government’s 3% growth forecast for this year is too optimistic (our forecast is 2.5%) and revenue from the new mining tax looks like it is running well behind expectations. As a result more budget cutbacks may lie ahead if the Government is to meet its surplus target. Another concern is the implied tax increase on companies as a result of shifting to monthly instalments, coming at a time of corporate uncertainty this is not good for business investment.
> Inflation in the September quarter was a bit higher than expected, not helped by sharp rise in prices for food due to bad weather, utilities due to the carbon price and health on the back of health insurance rebate changes. Underlying inflation also rose more than expected but is running in line with the RBA’s forecast of 2.5% for this year. While the upside surprise in inflation has made a rate cut next month a more marginal call, we think the RBA should and will cut on Melbourne Cup Day. Inflation is still benign and carbon pricing and other
Government changes have played a big role in pushing it higher. What’s more with growth likely to slow to around 2.5% inflation is likely to remain benign and possibly fall. If the RBA wants to be confident non-mining demand will pick up enough to offset the slowdown in the mining sector then interest rates will need to be cut further.
> Meanwhile skilled job vacancies continued to slide in September pointing to labour market weakness and house prices were flat in the September quarter according to APM, consistent with ongoing household caution. Major market moves
> The correction in global shares continued with concerns about profit growth continuing to weigh on markets. Australian shares also fell but are holding up relatively well thanks to the RBA’s resumption of rate cuts.
> While commodity prices fell with share markets, the $A rose slightly as higher than expected inflation led to reduced rate cut expectations for Australia. Bond yields generally rose. What to watch over the week ahead?
> In the US, expect modest gains in personal spending (Monday), a continuing rise in house prices and consumer confidence (Tuesday), the ISM manufacturing conditions index (Thursday) to remain at or around 51.5 and a rise in non-farm payrolls (Friday) of 120,000 with unemployment rising to 7.9%.
> Expect Euro-zone consumer and business confidence readings (Tuesday) and a final manufacturing PMI reading for October (Friday) to remain weak consistent with an ongoing mild recession.
> Chinese manufacturing PMIs for October (Thursday) are expected to show a slight improvement in line with the flash HSBC PMI adding to confidence that momentum in the Chinese economy may have bottomed.
> In Australia, expect a bounce in new home sales (Tuesday), a slight fall in building approvals (Wednesday), continued softness in credit (Wednesday), a slight fall in house prices in October (Thursday) and relatively benign producer price inflation (Friday). A speech by RBA Deputy Governor Lowe (Tuesday) will be watched for clues on future interest rate moves.
Outlook for markets
> Global shares remain in the correction/consolidation mode they have been in since mid September. Given uncertainties regarding the US election and fiscal cliff, short term earnings downgrades, unresolved issues in Europe and the Chinese leadership transition this may have a bit further to run. However, the broad rising trend in shares is likely to remain intact. Shares remain cheap, monetary conditions are ultra easy and a pick up in global growth on the back of easing by the Fed, the ECB’s bond buying program and stimulus measures in China should support profit growth in 2013. Australian shares are being given an added impetus by the resumption of RBA interest rate cuts which should boost profit growth in 2013. As a result we see further gains in share markets by year end and through 2013. > While sovereign bonds in safe countries are a good diversifier, bond yields are very low and point to low medium term bond returns. Corporate debt is a better proposition for those after income.
> The outlook for the $A remains messy. Uncertainties regarding China and ongoing RBA rate cuts are negatives. But US QE3, foreign central bank buying and prospects for improved global growth are positives. The likely outcome is for a $US0.95 to $US1.10 range, with the risk on the downside.
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Weekly market and economic update
More of the same over the past week with mixed news on profits, nervousness over the US “fiscal cliff” and no resolution regarding Spain and Greece seeing the correction in global shares continue. The good news is that credit markets haven’t confirmed the weakness in shares and nor has the $A which has remained strong.
> November 1 will mark the fifth anniversary of the peak of the Australian share market prior to the onset of the GFC. With the market peaking at 6854 for the All Ords in 2007 and currently running around 4500, having fallen to a low of 3112 in 2009, average returns have obviously been abysmal over the last five years as a whole. The annualised change in the All Ords over the past five years has been -7.7% pa. Including dividends this improves but only to a still poor -3.3% pa. The good news is that it rarely gets worse than this, with the only exception being the mid 1970s. After similar periods of weakness in the past, returns over the subsequent five years have been solid.
Major global economic releases and implications
> US economic data was mixed with September quarter GDP growth coming in stronger than expected at 2% annualised, the Markit manufacturing PMI rising slightly, new home sales continuing to trend up but pending home sales rising less than expected, initial jobless claims falling and durable goods orders up strongly but masking softness in capital spending. There was little new from the Fed with it continuing to characterise growth as moderate. So the clear message is that open ended quantitative easing will continue and the December Fed meeting will be watched to see whether the end of operation twist will be replaced with even more bond buying.
> The US earnings reporting season is more than half complete. The good news is that 63% of companies have come in better than expected in terms of bottom line earnings and earnings growth is likely to come in flat up from a consensus of down 2% a month ago. The bad news is that several big companies have missed, eg Apple and Amazon, less than 40% of companies are beating on revenue and outlook statements remain poor so profit growth expectations are being revised down. Earnings normally lag economic growth and so should start to improve over the year ahead if economic growth picks up a bit. Earnings reporting seasons elsewhere have been similarly messy with beats and misses roughly equal in Asia but slightly more beats than misses in Europe.
> Euro-zone manufacturing PMIs slipped in October but remained in the range they have been in for the last six months at a level which is consistent with roughly a 1% contraction in GDP this year. It doesn’t appear to be getting any worse, but there is no sign of improvement either. What’s more private lending is still contracting. The ECB has done well to stabilize borrowing costs in Spain and Italy, but still needs to ease overall monetary policy further. This is particularly so with German business conditions continuing to soften. In the UK GDP grew 1% in
the September quarter, helped by a rebound from the Jubilee holiday and a boost from the Olympics.
// 2
> Japan remains in stuck in deflation highlighting the need for more aggressive BoJ easing. The Government announced more fiscal stimulus but it’s not sustainable given Japan’s huge budget deficit and public debt.
> China’s HSBC flash manufacturing PMI rose in October adding to evidence China may be bottoming. Korean GDP rose just 0.2% in the September quarter. Fortunately stronger Korean exports over the first 20 days of October are a positive sign and policy stimulus should drive stronger domestic demand in the year ahead. Australian economic releases and implications
> The mid year budget review in Australia was a bit of a non-event at a big picture level with only a relatively mild downgrade to revenue expectations flowing from the mining slowdown meaning that budget savings only needed to be relatively minor in order to maintain the projected surplus. Our concern is that the full extent of the deterioration in the budget is understated. The Government’s 3% growth forecast for this year is too optimistic (our forecast is 2.5%) and revenue from the new mining tax looks like it is running well behind expectations. As a result more budget cutbacks may lie ahead if the Government is to meet its surplus target. Another concern is the implied tax increase on companies as a result of shifting to monthly instalments, coming at a time of corporate uncertainty this is not good for business investment.
> Inflation in the September quarter was a bit higher than expected, not helped by sharp rise in prices for food due to bad weather, utilities due to the carbon price and health on the back of health insurance rebate changes. Underlying inflation also rose more than expected but is running in line with the RBA’s forecast of 2.5% for this year. While the upside surprise in inflation has made a rate cut next month a more marginal call, we think the RBA should and will cut on Melbourne Cup Day. Inflation is still benign and carbon pricing and other
Government changes have played a big role in pushing it higher. What’s more with growth likely to slow to around 2.5% inflation is likely to remain benign and possibly fall. If the RBA wants to be confident non-mining demand will pick up enough to offset the slowdown in the mining sector then interest rates will need to be cut further.
> Meanwhile skilled job vacancies continued to slide in September pointing to labour market weakness and house prices were flat in the September quarter according to APM, consistent with ongoing household caution. Major market moves
> The correction in global shares continued with concerns about profit growth continuing to weigh on markets. Australian shares also fell but are holding up relatively well thanks to the RBA’s resumption of rate cuts.
> While commodity prices fell with share markets, the $A rose slightly as higher than expected inflation led to reduced rate cut expectations for Australia. Bond yields generally rose. What to watch over the week ahead?
> In the US, expect modest gains in personal spending (Monday), a continuing rise in house prices and consumer confidence (Tuesday), the ISM manufacturing conditions index (Thursday) to remain at or around 51.5 and a rise in non-farm payrolls (Friday) of 120,000 with unemployment rising to 7.9%.
> Expect Euro-zone consumer and business confidence readings (Tuesday) and a final manufacturing PMI reading for October (Friday) to remain weak consistent with an ongoing mild recession.
> Chinese manufacturing PMIs for October (Thursday) are expected to show a slight improvement in line with the flash HSBC PMI adding to confidence that momentum in the Chinese economy may have bottomed.
> In Australia, expect a bounce in new home sales (Tuesday), a slight fall in building approvals (Wednesday), continued softness in credit (Wednesday), a slight fall in house prices in October (Thursday) and relatively benign producer price inflation (Friday). A speech by RBA Deputy Governor Lowe (Tuesday) will be watched for clues on future interest rate moves.
Outlook for markets
> Global shares remain in the correction/consolidation mode they have been in since mid September. Given uncertainties regarding the US election and fiscal cliff, short term earnings downgrades, unresolved issues in Europe and the Chinese leadership transition this may have a bit further to run. However, the broad rising trend in shares is likely to remain intact. Shares remain cheap, monetary conditions are ultra easy and a pick up in global growth on the back of easing by the Fed, the ECB’s bond buying program and stimulus measures in China should support profit growth in 2013. Australian shares are being given an added impetus by the resumption of RBA interest rate cuts which should boost profit growth in 2013. As a result we see further gains in share markets by year end and through 2013. > While sovereign bonds in safe countries are a good diversifier, bond yields are very low and point to low medium term bond returns. Corporate debt is a better proposition for those after income.
> The outlook for the $A remains messy. Uncertainties regarding China and ongoing RBA rate cuts are negatives. But US QE3, foreign central bank buying and prospects for improved global growth are positives. The likely outcome is for a $US0.95 to $US1.10 range, with the risk on the downside.
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