Weekly market & economic update – 15 November 2013
18
Nov
2013
From Shane Oliver - AMP chief economist
Key events of the past week and implications
- The past week saw a bit of nervousness in investment markets early on regarding the prospects for a Fed tapering in December, as the initial news from the 3rd Plenum in China disappointed some and economic data was mixed. However, most share markets rose helped by dovish comments from Fed chair nominee Yellen.
- After a huge beat up, the vague nature of the communiqué from the 3rd Plenum in China disappointed some and this initially weighed on the Chinese share market. However, a leaked document to be formally released in the week ahead provided more details and a bit more confidence particularly in terms of faster progress in financial market liberalisation even though its suggests a less ambitious approach to reforming the imbalance between central and local government finances and to rural land ownership. What is clear though is that the focus of the Chinese leadership will be on reforms to allow market forces to play a more decisive role in the economy. However, the reform process will be gradual.
- In the US, fears of an imminent Fed tapering continue to wax and wane following the stronger than expected jobs report and comments from various Fed officials. But the key message seems to be that while tapering is likely to be discussed in December, it’s a long way from being a sure thing with voting Fed Presidents giving the impression that it’s too early and importantly vice-chair Yellen in testimony for her nomination hearing saying the economy is performing short of potential and needs to improve if the Fed is to reduce monetary stimulus. Yellen’s comments don’t preclude a tapering in December (as tapering could simply be offset by more dovish guidance on interest rates) but they do suggest that the probability of a December move is a bit less than 50/50. More broadly she sees the benefits of quantitative easing exceeding the costs, indicated little change in the approach the Fed has pursued under Bernanke and her testimony and the reaction of Senators to it suggests little risk she will not be confirmed.
- More broadly, Janet Yellen’s comments, combined with indications from both the ECB and the Bank of Japan, mean that global monetary conditions will remain very easy through next year. This along with still reasonable valuations and improving global growth means a very positive environment for shares.
- Australian politics descended into a bout of silliness with talk of a Government shutdown should the Federal debt ceiling not be increased. Some Australian politicians seem to be going through a bit of “me tooism” after the shutdown and debt default talk in the US. The bottom line is that whether the debt ceiling is raised to $400bn as the Opposition suggests for now or the $500bn the Government is demanding is on no consequence as Federal debt is only around $275bn at present and unlikely to reach the lower level of $400bn by 2016 or 2017. So forget the shutdown talk – it’s not going to happen. In fact it would make more sense to abolish the ceiling as it has no effect in terms of constraining debt anyway. The issue is a giant ho hum for financial markets.
Major global economic events and implications
- It was a light weak for US economic data but what was released was soft with a fall in small business optimism, a further decline in new mortgage applications a slightly worse than expected trade deficit and only a marginal fall in jobless claims. Good news from a major retailer about sales though helped boost confidence.
- The Eurozone economic recovery continued in the September quarter but only very slowly with a 0.1% quarterly rise after the 0.3% gain in the June quarter. Germany, Spain and Portugal grew slightly but France and Italy contracted slightly. Obviously this is not enough to deal with massive unemployment, high debt levels and falling inflation. Fortunately though the pick-up in business conditions PMIs and confidence measures seen over the last year points to further growth ahead and more monetary easing is likely on the way from the ECB.
- Japanese GDP growth slowed pretty much as expected in the September quarter to 0.5% quarter on quarter from 0.9% in the June quarter on the back of slower growth in consumption and investment. Leading indicators point to a rebound in the current quarter though. Other Japanese data was mixed with a slight fall in confidence and a tertiary activity index but a rising trend in machinery orders and falling bankruptcies.
- Another interest rate hike in Indonesia, along Indian data showing with much weaker than expected industrial production and 10% consumer price inflation highlighted the problems facing some key emerging countries.
Australian economic events and implications
- Australian economic data was mixed with a stronger than expected gain in housing finance, confirming that the housing recovery remains intact, and a rise in consumer confidence but a fall in the NAB’s measure of business confidence and very soft wages growth. Weakness in wages growth is to be expected given the soft labour market and as such is not surprising. What it does mean though is that there is no inflation pressure coming through from labour costs so it helps confirm that there is plenty of scope for a further rate cut if needed. But what is clear though is that the broad bounce in business and consumer confidence remains intact – the NAB measure remains well above recent lows – and construction finance and building approvals indicate the housing recovery includes an upswing in dwelling construction. As such we see the RBA remaining on hold.
Major market moves
- While share markets initially had some wobbles on the back of taper talk in the US and the vague communiqué from the Third Plenum in China they bounced back strongly after dovish comments from Fed chair nominee Yellen and as more details emerged regarding the Plenum. Most share markets saw solid gains, with Australian shares coming in little changed as falls in bank shares weighed a bit.
- Commodity prices were mostly a bit weaker, including the oil price which is being weighed down by increasing US supply. In fact the US produced more crude oil than it imported last month. Soft commodity prices weighed slightly on the $A.
- Bond yields rose in Australia but fell in the US and Europe on the back of Yellen’s dovish comments and mixed economic data.
What to watch over the next week?
- In the US, attention will likely focus on the release of the minutes from the Fed’s October meeting (Wednesday) for further guidance on the chance of a December tapering. The trouble is that it is now very dated given dovish comments by various Fed officials, particularly by Janet Yellen. On the data front, expect a modest rise in the November NAHB home builders conditions index (Monday) as a result of the ending of the government shutdown, but the shutdown is likely to have weighed on October data due Wednesday for retail sales resulting in just a 0.1% gain and existing homes sales which are expected to have fallen slightly. The preliminary Markit PMI for November (Thursday) is also likely to show a post shutdown bounce. Meanwhile, expect the CPI (also Wednesday) to show inflation running at just 1.1% year on year.
- In the Eurozone the focus will likely be on preliminary November business conditions PMIs (Thursday) which are likely to show a continuing rising trend.
- China’s flash HSBC manufacturing conditions PMI (Thursday) is expected to show a stabilisation around the October reading of 50.9 consistent with continuing solid growth and details from the Plenum will also be scrutinised.
- In Australia, the minutes from the last RBA meeting (Tuesday) will likely confirm that it retains a mild easing bias and that its more concerned about the strong $A than rising house prices at this stage. Attention will focus on the minutes of the RBA’s monthly policy meeting (Tuesday). Speeches by Assistant Governor Debelle (Wednesday) and Governor Stevens (Thursday) will also be watched closely.
Outlook for markets
- After solid gains from early October lows and with technical and sentiment indicators a bit stretched a short term correction or consolidation in shares would not be surprising. However, the trend in shares is likely to remain up as valuations remain reasonable, monetary conditions are set to remain very easy and profits are likely to improve next year as global and Australian growth picks up. Australian shares remain on track to hit 5500 or even higher by year end, with a little help from a Santa rally.
- Government bond yields are likely in a gradual upwards trend as the global economy continues to pick up momentum and as Fed tapering eventually occurs. Low yields and an unwinding of years of massive inflows point to poor sovereign bond returns ahead. However, dovish forward guidance from central banks is likely to ensure the rising trend in yields remains very gradual.
- Expect the $A to be buffeted in the short term between signs Australian rates have bottomed and stable growth in China but talk of Fed tapering & RBA jawboning. The medium term trend in the $A is likely to remain down.
By Dr Shane Oliver, Head of Investment Strategy & Chief Economist
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