“We’re extremely pleased to welcome Bob to the team,’’ said Lisa Boyce, General Manager of Product and Investment Communications, NAB Asset Management.

“He’s a well-known and respected economic commentator in the financial services industry and his appointment will help us continue to deliver an outstanding service to our adviser and investor base.”

Prior to joining NAB AM, Mr Cunneen spent 23 years with AMP Capital as a Senior Economist with particular specialisations in global economic analysis, global bonds, currency and equity markets for AMP’s diversified funds.

“I’m excited to have joined the NAB Asset Management business. NAB AM has a comprehensive range of investment solutions which cater for all types of investors including the increasingly popular MLC Inflation Plus portfolios,” Mr Cunneen said.

“I look forward to keeping investors and advisers informed about the changing economic environment and solutions to help manage their wealth.”

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• America’s payroll employment report for June provided a positive surprise. There was robust job gains of +288,000 and the US unemployment rate fell to 6.1% which is a near 6 year low. Given these encouraging job gains, the US central bank is likely to continue their strategy of gradually tapering asset purchases  (“Quantitative Easing”) until their completion in late 2014. However there are growing prospects that the US central bank will raise interest rates earlier than the market currently expects in mid 2015.
• Australia’s economic data provided mixed news. Nominal retail trade fell in May with sharp declines in department store and clothing sales. This could be due to Australian consumers being concerned over the Federal Budget’s higher taxes and spending cut measures and the jobs market. By contrast, residential building approvals surged in May. For the Reserve Bank, these mixed results for May’s retail sales and building approvals are likely to keep the RBA’s “very accommodative” 2.5% cash interest rate intact over coming months.
• The Reserve Bank (RBA) Governor Glenn Stevens issued warnings to housing investors and currency traders. The RBA Governor warned that if there was a “further big run up in prices” for housing with “overconfident expectations” and “increases in household leverage”, then this would be a “matter for concern”.  For the Australian Dollar, the RBA considers this is “uncomfortably high” as “most measures would say it is overvalued”. Hence “investors are underestimating the likelihood of a significant fall”.

What to watch over the week ahead?

• Australia labour force data for June will provide an important gauge of economic activity and confidence.  Job gains have been solid this year by averaging nearly +20,000 per month. However Australia’s unemployment rate has only marginally improved from 6.0 % to 5.8%. June’s result is likely to be on the softer side with only +10,000 extra jobs and unemployment edging up to 5.9% given the recent run of mild retail spending data and weaker consumer sentiment. However housing finance data for May should show solid rise in credit approvals given the strong rise in housing construction and housing prices witnessed so far this year.
• American corporations start their June quarter earnings season next week. Corporate earnings are expected to rise by a solid +6% for the past year according to Reuters. Given that US shares are at historic highs, there will be a heightened sensitivity to any earnings surprises or disappointments over the next few weeks.
• Financial markets will also concentrate on the Federal Reserve’s (FED) meeting minutes for June. These meeting minutes may provide some guidance on when the US central bank will end the asset purchases program (i.e. “Quantitative Easing”) this year and the possible timetable for raising interest rates in 2015. American economic data due next week is on the thin side. There is the NFIB small business survey for June which should see further gains in confidence.
• China’s Consumer Price Index and monetary aggregates for June are due next week. This data will provide a timely measure of inflation pressures and credit growth. Modest results for June inflation & monetary data will provide the Chinese central bank with flexibility to relax policy if needed to support economic growth.

Outlook for markets

• Global shares are vulnerable to a correction after the strong run in the first half of 2014. There are numerous possible catalysts for this correction in coming months. These include the US central bank rapidly winding back their policy stimulus and moving steadily towards raising interest rates, political risks in Iraq and Ukraine, or perhaps disappointment in Europe given a frail economic recovery and fragile financial system.
• However the strategic climate is still favourable for Global Shares. So the broad trend over the next few years is likely to remain up for Global Shares. Fundamentals remain favourable for Global Shares given reasonable current valuations, improving profits with rising economic activity and low Global interest rates. Hence any short term correction in Global Shares is seen as a buying opportunity.
• Government Bond yields should resume their gradual rising trend given improving Global growth and the US central bank moving towards raising interest rates in 2015. Hence the current low yields in Government bonds, cash and bank deposits are not attractive and should deliver very low returns over the coming year.

Major global economic releases and implications

• America’s ISM business surveys indicate that the US economy rebounded sharply in the second quarter after the harsh winter weather. The ISM manufacturing survey edged lower by -0.1 to 55.3 in June. Given that May’s ISM reading was a 5 month high, June’s reading is still very encouraging for US activity. The ISM Services survey marginally fell by -0.3 to 56.0 in June. Yet this is close to a 9 month high. These ISM surveys are consistent with strong +3% Real GDP growth in the June quarter.
• Europe’s unemployment is slowly coming down with the “very gradual” economic recovery. May’s unemployment rate for the Euro area is 11.6% which is an improvement on 12% unemployment rate recorded at the same time last year. However unemployment rates in some countries are still disturbingly high with Greece (26.8% unemployment) and Spain (25.1%) topping the distress list. For the European Central Bank (ECB), this labour market distress ensures that interest rates will remain low for a long time. The ECB kept their key policy interest rate at 0.15% at July’s meeting. The ECB President Dr Mario Draghi acknowledged that Europe’s economy was still in a “very gradual recovery”.
• China’s official PMI manufacturing survey shows an encouraging rise in business activity and confidence. June’s PMI rose by +0.2 to 51.0 which is its highest reading in the past six months. This PMI suggests that China’s economic growth has modestly accelerated towards a solid +7.5% Real GDP annual pace.
• Japan’s business surveys are giving mixed readings. The Bank of Japan’s Tankan survey for the June quarter shows that April’s consumption tax rise has dented business confidence. However this appears a temporary impact as the Tankan ‘outlook’ responses indicate a rebound in the September quarter. Solid gains for Japan’s PMI manufacturing survey and the Shoko Chukin small business survey for June also suggest that economic activity is set to revive in the second half of 2014.

Australian economic releases and implications

• Nominal retail sales fell sharply by -0.5% in May compared to the expected +0.1% gain. The sharpest falls were recorded in department stores (-2.6% mom), clothing and footwear (-2.3%) and household goods (-0.9%).  Previous months were also revised down be a cumulative -0.4%. So May’s result is a significant disappointment. Over the past year, nominal retail sales have increased by +4.6%.
• Residential housing approvals recovered strongly in May with a +9.9 monthly gain.  There was a robust rebound in the volatile apartments sector which rose by 27% in May while private housing rose by a more modest +0.5%.
• Hence these mixed results for May’s retail sales and building approvals are likely to keep the RBA’s “very accommodative” 2.5% cash interest rate intact. So the RBA’s mantra of “the most prudent course is likely to be a period of stability in interest rates” should continue to be chanted in Martin Place over coming months.

Major market moves

• Global shares generally had a positive week. American shares (S&P 500) rose +1.4% to a record high.   Both Germany’s DAX and Britain’s FTSE recorded strong gains of +2.3%. Japan’s TOPIX also benefitted by rising +2.6% for the week.  Australia’s ASX 200 rose by a solid +1.7% for the week.
• Government Bond Yields in America and Britain responded negatively to the better US economic data and the prospects of higher interest rates sooner in 2015.  American 10 year Government Bond yields rose by +10 basis points to yield 2.64% while British 10 year Gilt yields rose by +11 basis points to 2.75%. For Australian 10 year bond yields, there was milder upward pressure as yields rose by +5 basis points to 3.59%.

By Bob Cunneen, Senior Economist

———————–

 Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591) (AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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• Spain’s Federal Government continues on the “Road to Nowhere” with another round of budget tightening. The Rajoy Government announced austerity measures that include a wage freeze, a -8.9% cut to public spending and a consumption tax increase (VAT). A sign of desperation is that “lottery wins” over Euro €2,500” will be taxed at 20%. These austerity measures aim to move Spain’s budget deficit from circa 6% GDP in 2012 towards 4.5% GDP for 2013. So considerable pain for marginal gain. Spain’s central bank has ominously warned this week that Spain’s economy keeps “falling at a significant rate”. This “road to nowhere” of European budget tightening in the midst of a recession is the main downside risk to the Global economy. 
• European economic data this week was also disappointing and frustrating. The European Commission’s surveys of business & consumer sentiment were weak and suggestive of a mild recession. The EC industrial sentiment fell to its lowest level in the past 33 months.  The EC consumer sentiment result was at a 3 year low. The European Central Bank (ECB) measure of private sector credit shows that European banks remain reluctant to lend. Private sector loans have fallen by -0.6% over the year to August.
• In more encouraging news, American house prices show signs of a sustainable recovery. The S&P Case Shiller “10 Major Cities” measure rose by +0.4% in July. Over the past year, American house prices have risen +0.6%. American consumer confidence is now running at a warmer temperature after a chilly period mid year. The Conference Board‘s consumer confidence survey rose to a 7 month high in September.

Australian economic releases and implications

• Australia’s central bank indicates that Australian banks have limited direct asset exposure to troubled European nations. The RBA’s Financial Stability Review (FSR) highlights that most of the Australian bank’s asset exposures are to France, Germany and The Netherlands for A$ 38.9 billion while the troubled nations (Spain, Portugal, Greece Ireland and Italy) are only A$ 4.7 billion. However there is an impact through “swings in global financial market sentiment” and Europeans banks cutting their lending to Australian commercial property.
• The RBA’s assessment is that Australian households appear to be “coping well with its debt levels”. Australian “household borrowing has also slowed in recent years”. The RBA notes that “many households are choosing to repay their existing debt more quickly than required”. Around 50% of “borrowers are repaying their mortgages ahead of schedule and are thereby building up buffers”. These “buffers” are “estimated to be equivalent to around 1½ years of scheduled repayments (principal plus interest).” 

Major market moves

• Global shares recorded mild falls during the week but considerable volatility with European concerns. American shares declined by circa 1%. There were sharper falls in Europe with Spain recording with a -2 % fall.
• Australian shares were more resilient with a marginal fall of circa 0.5%. The prospect of the RBA cutting interest rates appears to be contributing to the resilience.
• American and Australian bond yields fell with the intensification of Spain and Greece’s woes. The scene of public protests in Madrid & Athens has generated some “safe haven” buying in 10 year bond yields. 

What to watch over the week ahead?

• The Reserve Bank should cut the Australian cash rate by another 0.25% to 3.25% on October 2nd.  Given subdued business & corporate sentiment, slowing jobs growth, sluggish retail spending and a high Australian Dollar that is weighing “more heavily” on the economy, there is a strong case to cut interest rates next week.
• The European Central Bank’s Governing Council meets on October 4th and should also cut interest rates by another 0.25%. Given that the European banking system is reluctant to lend, that European Governments are committed to severe budget tightening and the broader European economy is in recession, there is a robust case for the interest rate to fall to a record low of 0.5%.
• America sees the release of key September data on employment and business surveys. Sedate jobs growth and a stubbornly high unemployment rate have been the major concern for America’s central bank as well as the Presidential contenders. A marginal improvement in September is expected after Augusts’ disappointing +96,000 job gains and unemployment rate at 8.1%. The ISM business surveys for manufacturing should also modestly improve for September after the subdued results over the last 3 months.
• China’s financial markets are essentially closed next week for holidays. 

Outlook for markets

• Allowing for Europe’s budget tightening obsession and recession woes, the rest of the Global economy is in a modest slowdown phase. Global growth momentum should stabilise by the end of this year given the extraordinarily low interest rates and assertive commitment by the American & European Central Banks’ to purchase assets. China’s economic activity is cooling at a steady pace while inflation pressures have dissipated, thereby allowing further policy stimulus after the leadership transition in October.
• For Australia, the RBA is likely to lower interest rates over coming months given the softer Global growth profile, the strong Australian Dollar and mild inflation pressures. These interest rate cuts should provide strong support for Australian Shares over coming months as well as supportive of the struggling “Non-Mining” economy.
• Global Shares are now in a consolidation phase after a strong rally in the September quarter. While the last week saw a disappointing pullback in Global Shares, this comes after robust gains for the quarter. Yet the medium term prospects for Global Shares is still favourable.
• Global Shares are cheap on comparisons to corporate earnings as well as relative to Government Bonds. Any significant pullback over coming weeks should be seen as a great buying opportunity for Global Shares for the medium term. Global Shares should end 2012 on a strong note.
• American and Australian Government bonds provide extraordinarily low yields currently. This would suggest low returns for the medium term. Corporate bonds are a better proposition for those seeking income but who are cautious about investing in shares presently. 

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