• The inconclusive Italian election result with the centre left winning the lower house but not the Senate clearly spooked investors fearful that it would trigger a renewed escalation of the Euro-zone crisis. However, while political uncertainty is the last thing Italy needs right now there is a danger in over-reacting. Most Italian politicians would prefer to avoid another election so the most likely outcome for now would appear to be a coalition government led by the centre left’s Bersani. While there may be a slowing in the pace of austerity (probably not a bad thing) and economic reform might be harder to achieve at least Italy should be able to hold the line on previous PM Monti’s reforms. Secondly, with the ECB’s “whatever it takes” commitment to defend the euro now in place the risk of contagion threatening other countries is far less than it was at the time of the similarly poor Greek elections in May last year. Reflecting this, Spanish bond yields fell over the past week. So while Italy will remain a source of risk, its unlikely to be enough to derail the gradual improvement in Europe.
• In Japan, further monetary easing looks to be certain with the Government nominating well known dove Haruhiko Kuroda as the next Bank of Japan Governor. He has long advocated more aggressive quantitative easing from the BoJ and largely blames it for Japan’s two lost decades. So while the BoJ has already eased a lot over the past three months it looks set to become much more aggressive. This will likely see the Yen fall to around ¥105 against the $US by year end and around ¥110 against the $A which in turn will likely underpin a further 20% or so gain in Japanese shares this year.
• In the US, Fed Chairman Bernanke put to rest any concerns that the Fed was about to slow or end quantitative easing with the view that the benefits of QE in terms of stronger growth and job creation still far outweigh the costs in the form of achieving a smooth exit, potential losses and the risk of inflation and financial instability. Our assessment remains that the current pace of QE will continue at least until mid year before any tapering starts to occur.
• The sequester spending cuts in the US amounting to around $US85bn this year are now kicking in, but are unlikely to pose a major threat to US growth. While they will be a dampener on growth, owing to lags and some of the belt tightening in defence having already occurred the impact is likely to be less than 0.5% of GDP and is manageable given the uptick in housing and capital spending that appears to be underway in the US. Over 10 years they will cut another $US1.2 trillion from the US budget deficit.

Major global economic events and implications

• US economic data was impressive with strong gains in the ISM manufacturing conditions index, house prices, home sales, underlying capital goods orders and consumer confidence and a fall in unemployment claims. So while payroll and high income tax hikes along with the sequester will be a drag, fortunately the US appears to be maintaining reasonable momentum in key growth indicators. 
• Euro-zone unemployment rose to 11.9% in January from 11.8%, which is not surprising given the continuing recession, but more importantly economic confidence indicators rose further in February. This amounts to the fourth monthly improvement in a row and is consistent overall with a moderating recession in Europe. Meanwhile, core inflation fell to 1.3% in January suggesting plenty of scope for further monetary easing.
• Japanese industrial production rose less than expected in January, but measures of manufacturing conditions and small business confidence both improved further in February suggesting Japan is exiting from its latest recession. Deflation remained entrenched in January highlighting the need for more BoJ easing.
• A fall in China’s manufacturing PMIs for February were clearly disappointing but may owe to the timing of the Chinese New Year and bring the PMIs into line with the modest growth uptick we are anticipating.

Australian economic events and implications

• Australian data was mixed with another rise in new home sales and a continuing gradual rise in house prices suggesting that rate cuts are getting some traction, but credit growth remaining soft and capital spending data looking very weak. Capital spending unexpectedly fell 1.2% in the December quarter providing a weak lead for December quarter GDP growth. More importantly though, the first estimate of capital spending for the coming financial year fell 8% from the first estimate for the current financial year from a year ago led by weakness in mining and manufacturing with other industries only up 5%. This marks the first decline between first estimates in three years and only the fourth in the last 25 years. While the capex plans weren’t quite as bad as feared and are always open to interpretation, it nevertheless confirms that the peak in mining investment is near and that it’s still unclear that non-mining investment will fill much of the gap left by the mining sector.
• The December half profit reporting season has now wrapped up, and while overall profits were down the outcome was far better than feared and there’s now some light at the end of the profit tunnel. Total profits for the December half have come in around 10% down on a year ago driven by a 35% slump in resources profits but with banks up 2% and industrials up around 10%. The key themes were that: the results were much better than feared with upside surprises running at their highest in three years; soft sales growth but an aggressive focus on cost control to manage margins; good jumps in cyclical value stocks like Harvey Norman, JB HiFi, Qantas and Bluescope Steel; and a further improvement in outlook comments backed up by rising dividends suggesting that companies are confident that there will be an upturn in the profit cycle. Reflecting this, analyst earnings estimates have been upgraded slightly for the first time in two years. While shares have run ahead of earnings, this is usually the case during the early stages of share market recoveries. Moreover, the profit reporting season combined with signs that interest rate cuts are starting to get traction in driving stronger demand in the economy are consistent with the profit cycle having bottomed.
• 44% of companies have exceeded expectations, which is the best in three years; 53% of companies have increased their dividends from a year ago and only 22% have cut them; 40% have exceeded expectations on dividends with only 26% delivering dividends worse than expected; and there have been more positive outlook comments than negative. Reflecting the better than feared results, 55% of companies have seen their share price outperform the market on the day their results were released.

Major market moves

• Share markets mostly rose over the past week with good US and European data offsetting Italy’s election result and worries about sequestration in the US. European shares fell 0.2%, but US shares rose 0.2%, Japanese shares rose 1.9%, Australian shares rose 1.4% and Chinese shares rose 2%. 
• However, investor nervousness saw the $US rise & commodities prices fall and this contributed to a fall in the $A.
• While Italian bond yields rose following its messy election outcome, bonds rallied elsewhere. Even Spanish bond yields fell suggesting little fear of contagion from Italy.

What to watch over the next week?

• In Australia, the RBA is expected to leave interest rates on hold again on the grounds that there is tentative evidence that rate cuts are getting traction and that there is plenty of monetary stimulus still in the pipeline. The December quarter capex survey was probably not soft enough to convince the RBA to ease again just yet. However, the RBA is likely to signal that it retains an easing bias with the benign inflation outlook providing scope to ease if needed. My view is that although green shoots are starting to appear in the Australian economy, they are still very fragile and to ensure they don’t whither the RBA should be cutting rates again.
• On the data front expect a 2% rebound in building approvals (Monday), a 0.4% bounce in retail sales (Tuesday) and a 0.3% rise in December quarter GDP (Wednesday) resulting in year ended growth falling to 2.7%. While net exports and dwelling investment are expected to add to December quarter GDP growth, consumer spending and capex will be drags. Data for business indicators (Monday) and trade (Thursday) will also be released.
• In China, the National People’s Congress will get underway Tuesday and will likely adopt a 7.5% growth target for this year (the same as in 2012) and a 3.5% inflation target. Economic activity data for February (Saturday) is likely to have remained strong, but growth in lending, exports and imports are all likely to have slowed after the New Year related surge in January. Inflation is likely to have bounced back to 3% thanks to a surge in food prices, but should prove temporary as food prices have since fallen again.
• In the US the focus will be on employment data (Friday) which is expected to show February jobs growth of 150,000, which is good but not so strong as to invite talk of the Fed ending monetary stimulus. Unemployment is likely to have remained around 7.9%. The ISM non-manufacturing conditions index (Friday) is expected to remain solid and the Fed’s Beige Book (Wednesday) and the trade balance (Thursday) will also be released.
• On the global central bank front on Thursday, the Bank of England may announce more quantitative easing but both the ECB and BoJ are likely to remain on hold, with the latter awaiting the arrival of the new Governor.

Outlook for markets

• Shares appear have entered a correction or consolidation phase which may still have a bit further to go in the short term given risks around Italy, Spain, the budget sequester in the US and Chinese property tightening measures. However, any further set back is likely to be mild and the broad trend in share markets is likely to remain up. Equity valuations remain reasonable, the strengthening growth outlook points to stronger profits ahead and investors are likely to increasingly switch from low yielding cash and bonds into shares as confidence continues to build. A pick up in M&A activity is also likely to be positive for shares. So notwithstanding the usual bumps along the way this all adds up to a positive backdrop for share markets.
• While sovereign bonds have been a great diversifier and a great investment in recent years they are becoming more vulnerable as the improving global growth outlook will likely see bond yields move higher over the year ahead resulting in capital losses for investors in sovereign bonds.
• The outlook for the Australian dollar remains messy. Mixed Australian economic data is a negative but quantitative easing in the US and now Japan is a positive. The likely outcome is for a $US0.95 to $US1.10 range.

The post Weekly economic and market update appeared first on AdviserVoice.

• GDP growth came in at 7.9% year on year, which was stronger than expected and well up from the low in the September quarter of 7.4%. December data provided the same message with growth in industrial production at 10.3% year on year up for the fourth month in a row, growth in retail sales at 15.2% year on year accelerating for the fifth month in a row and growth in fixed asset investment remaining strong at 20.6%. While we don’t expect a return to double digit growth, the pick up in China’s growth rate is good news for global growth and good news for Australia and resources stocks.
• The reawakening of Japan after a 20 year period of stop go recession and deflation is shaping up as a major issue for 2013. New Japanese PM Abe’s comments that he will seek a bold policy leader for the Bank of Japan and that the economy is not going to change “unless we display a firm commitment to escape deflation” underlines the fundamental change in policy making now taking place in Japan. If, as appears increasingly to be the case, Japan is serious and embarks on a path of monetary reflation intent on exiting deflation it has a number of (mostly positive) implications for the global economy: the Japanese Yen is likely to fall further; Japanese shares are likely to outperform; further monetary easing in Japan will add to very easy global monetary conditions; the Japanese economy will no longer be a drag on global growth; and weakness in the Yen will put more pressure on competitor countries such as Korea and Taiwan to also adopt easier monetary conditions. As Australia’s second largest export market an exit from deflation in Japan would also be a positive for Australia, albeit more monetary easing in Japan will add to carry trade pressure boosting the $A.
• While it occurred while I was on leave, the relaxation and now phased implementation of the Basle liquidity requirements for banks is good news. The original requirements would have posed a major threat to global bank lending at a time when the global economy is still a bit fragile. Fortunately global central bankers have seen sense and have removed, yet again, another threat to the global economy.
• In the US, the debt ceiling is looming as a major issue with the Government having to prioritise commitments beyond mid February/early March unless it is raised. Fitch Ratings has warned that America’s AAA sovereign rating is at risk unless it raises the ceiling in time or if it fails to come up with long term deficit reduction measures this year. However, news that House Republicans will likely pass a three month extension to the debt ceiling is very positive to the extent that such a delay will allow time to hopefully resolve the fight over longer term budget savings and the sequester spending cuts due to occur on March 1. Its also worth noting that as with the fiscal cliff, everyone is talking about the debt ceiling issue and the brinkmanship that prevails in US politics is well known so unless things really go off the rails such that there will be no deal then the impact on markets may be less than feared.

Major global economic events and implications

• While the US debt ceiling and budget issues are now looming, most US data suggests that the US economy is motoring along pretty well. To be sure, soft readings over the past week for regional manufacturing conditions indicators were a disappointment.  However, retail sales growth remained solid in December despite the fiscal cliff worries at the time, housing related indicators remain strong with housing starts up a whopping 12% in December and a survey of home builders and rising weekly mortgage applications pointing to more strength ahead, growth in industrial production was reasonable in December, jobless claims fell sharply over the past week and the Fed’s Beige Book pointed to an improvement in economic activity. On top of this inflation remains benign suggesting no threat to the continuation of the Fed’s expansionary monetary policy.
• US December quarter earnings reports have been reasonable with around 66% of the 67 S&P 500 companies to have reported so far coming in better than expected.

Australian economic events and implications

• In Australia there was one bright note with car sales rising to a record high in December. Against this most other data releases were soft with weak readings for employment and unemployment, a further slump in job advertisements pointing to more labour market weakness ahead, consumer sentiment remaining sub-par in January, a sharp fall in December imports pointing to weak domestic demand and soft readings for housing finance in November leaving in place only a weak rising trend. Overall the Australian economy remains sub par, particularly so given that the RBA started cutting interest rates over a year ago.
• Fortunately, the TD/Melbourne Institute’s Inflation Gauge for December indicates that inflation remains benign suggesting plenty of flexibility for the RBA to cut interest rates further.

Major market moves

• Thanks to solid economic data, US shares rose 0.9% making it to a new post GFC high and are now just 5% below an all time high. This helped drive gains in European (up 0.3%), Japanese (up 1%) and Australian shares (up 1.3%). Chinese shares also pushed 3.3% higher, helped by solid December data.
• Commodity prices mostly rose on global growth optimism.
• The $A fell slightly with soft Australian economic data offsetting improving global confidence. More broadly though, the $A still seems to be stuck in a holding pattern.
• Bond yields fell slightly over the past week but with the broad trend remaining up as safe haven demand seems to be weakening in the face of more confidence regarding global growth.

What to watch over the next week?

• In the US, housing and manufacturing will be the key points of interest over the week ahead. December data for existing home sales (Tuesday) and new home sales (Friday) are likely to show that the US housing recovery remains on track. The Markit manufacturing conditions PMI (Wednesday) will also be watched for further signs of improvement in manufacturing.
• In the Euro-zone, business conditions PMIs for January (Thursday) will be watched for further evidence of stabilisation and improvement that has become evident in recent months’ readings.
• In Japan, all eyes will be on the Bank of Japan which meets Tuesday and is likely to lift its inflation “target” to 2% and possibly announce even more monetary stimulus, following intense pressure from the new Government. CPI data due Friday is likely to confirm that prices continued to deflate in December.
• In China, the HSBC flash manufacturing PMI ((Thursday) will be watched for further signs of improvement.
• In Australia, December quarter inflation data due Wednesday will be the key focus with a benign reading critical as to whether the RBA will cut interest rates again in the short term. After the carbon tax inspired boost to inflation in the September quarter, we expect inflation to have settled down again with headline inflation of 0.6% in the quarter or 2.6% year on year and core inflation of 0.6% in the quarter and 2.4% year on year. Falls in prices for food, clothing and health are expected to offset rises in prices for alcohol and tobacco, transport and holiday travel. With inflation likely to be in the middle of the RBA’s target range, this should leave plenty of scope for further rate cuts from the RBA in the months ahead. However, unless the underlying measures of inflation come in well below 2.4% year on year the RBA may well choose to do nothing at its February meeting, preferring instead to wait for more information as to how the economy is responding to recent rate cuts, particularly given the rebound in iron ore prices over the last two months.

Outlook for markets

• After 10% or so gains since mid November shares are a bit vulnerable to a short term correction, particularly as we go into US budget & debt ceiling negotiations and the Italian election in February. However, notwithstanding the risk of a short term correction, shares are likely to head much higher this year. The global growth outlook is improving led by China and the US and a fading of the Euro-zone crisis which should result in better momentum for profits. Global monetary conditions are ultra easy and getting even easier. Shares are likely to benefit from investors switching out of low yielding bonds. And share market valuations remain reasonable. Australian shares will also benefit from RBA rate cuts starting to drive a pick up in the cyclical parts of the economy. So notwithstanding the usual bumps along the way this all adds up to a positive backdrop for share markets. By year end we see the ASX 200 rising to around 5000.
• Sovereign bonds have been a great diversifier and a great investment in recent years but are now very vulnerable as the year ahead is likely to see a rising trend in bond yields as global economic growth improves which will result in capital losses for investors in sovereign bonds.
• The outlook for the Australian dollar remains messy. Softish Australian data and RBA rate cuts are negatives. But growing quantitative easing in the US and now Japan, central bank buying and prospects for improved global growth are positives. The likely outcome is for a $US0.95 to $US1.10 range.

The post Weekly economic and market update appeared first on AdviserVoice.

• American consumer spending has been reasonably solid considering the recent political turmoil over budget tightening (“fiscal cliff”) as well as Hurricane Sandy. Further spending gains are expected. The strong positive for the US economy has been the housing recovery in 2012, so strength in housing construction would also be welcome.
• China’s see the release of critical economic activity results for the end of 2012. China’s Real GDP result for the December quarter should show that economic growth stabilised at a 7.5% pace. This comes after a slowdown in the preceding quarters from the +9% growth pace set in 2011. Industrial production & Retail Sales should show solid results for December consistent with China’s economy becoming more focused on domestic demand rather than exports.
• Australia’s labour force data for December is the key focus. Given subdued sentiment in the “Non – Mining” economy as well as significant job loss announcement in both the private & public sectors in 2012, a soft result is expected for employment for the end of 2012.  Job losses of circa -10,000 are anticipated for December while the unemployment rate is expected to rise sharply from 5.2 % to 5.4 %.  

Outlook for markets

• Global shares appear to be now entering a consolidation phase after a sharp rally with the “fiscal cliff” vote in the opening week of 2013.  America’s fiscal problems are yet to be fully resolved with further political turmoil likely over government spending and the debt ceiling. Caution will also likely prevail as   the US corporate earning reporting season for the December quarter has just started.  Europe faces significant political challenges with an Italian general election in February while Spain’s is struggling with a weak banking system and an alarming +26% unemployment rate. Hence Global Shares seem set to drift sideways over coming weeks.
• Yet 2013 should ultimately be another good year for Global Shares. Global growth should slowly improve in 2013 as America employment and housing recovery gathers speed while Europe’s economy gradually stabilises. This will create a solid corporate profit environment favourable for Global Shares. Given Global Shares are undervalued on historic measures and with investors likely to be tempted to switch from overvalued and low yielding Government Bonds, this year should be another rewarding one for share investors.
• Global Sovereign bonds are vulnerable to a rising trend in yields as global economic growth improves. American, German, Japanese and Australian Government bonds provide extraordinarily low yields currently. This would suggest low returns for the medium term. Corporate bonds are thus a better proposition for those seeking income but who are cautious about investing in shares presently.

Headline developments of the past week

• Australia’s nominal retail sales disappointed in November with a marginal -0.1% fall. Considering that the RBA had cut interest rates by 0.25% in the previous month, this is a very soft result. Over the past year, Australian nominal retail sales have recorded only modest growth of +2.9%.  For the RBA, this soft November retail sales result would suggest further interest rate cuts may be required in 2013 to revive retail spending.
• Europe’s labour markets continue to weaken given the recession conditions prevailing. November saw Europe’s unemployment rate climb to 11.8%. Within Europe, there is a dramatic divergence in jobless rates. Greece’s unemployment rate of 26.8% and Spain at 26.6% contrast sharply with Germany’s 5.4% unemployment rate. Even Italy (11.1%) and France (10.5%) are also struggling with elevated unemployment rates in November.
• In more encouraging news, China’s trade performance improved with a sharp pickup in exports. China’s export growth rose at a +14% annual pace in December which is a dramatic revival compared to November’s muted +3% pace. A pick-up in China’s export volumes would typically signal a revival in global growth. For Australia the news is considered beneficial as China’s import growth revived to a +6% annual pace signalling that demand for Australia’s commodities is gaining speed. This is particularly apparent in the sharp revival in the spot Iron Ore price from US$ 87 in August 2012 to now US$ 158 per ton.
• Japan’s new Government announced a fiscal stimulus package of Yen 10 billion (A$ 109 billion) to revive Japan’s weak economy. This stimulus should enable Japan slowly emerge from its current recession in 2013 although the government debt burden is set to surge beyond the recent estimates of 237 % of Nominal GDP.

Major global economic releases and implications

• Europe’s economic activity data released this week was also disappointing. The European Commission’s surveys of business & consumer sentiment were weak and suggest that a mild recession continues in Europe.
• However the European Central Bank (ECB) kept their key policy interest rate on hold at 0.75%. The ECB President Dr Draghi conceded that the risks “remain on the downside” for Europe given “balance sheet adjustments” and “persistent uncertainty”. Dr Draghi expected that “later in 2013, economic activity should gradually recover”.
• America’s economic releases were mixed last week. The NFIB small business survey shows soft confidence readings in December. Yet consumer credit demand is slowly reviving judging by November’s annual +6% rise. Housing mortgage applications and refinancing were strong in the opening week of this year.  
• China’s annual inflation showed a mild pickup to 2.5% in December given the recent cold weather adversely impacting vegetable prices. However price pressures seem generally well contained and below the central bank’s 4 % inflation target. So there is still scope for China to gradually relax monetary policy in 2013.                     

Australian economic releases and implications

• Job vacancies fell sharply in November 2012 by 7%. This signals that labour demand is clearly softening with the “non mining economy” struggling (sectors such as manufacturing, retail, transport and tourism are very subdued). 
• Australia’s trade performance deteriorated in November with an increased deficit of A$ 2.6 billion. This is the fourth largest monthly deficit on record. Strong capital import demand given the Mining investment boom and solid consumer good imports taking advantage of a high Australian Dollar were the key factors for the larger deficit.
• Building approvals did improve by +2.9% in November indicating that housing construction is slowly responding to lower interest rates.  

Major market moves

• Global shares were generally flat for the past week. American shares (S&P 500) rose marginally by +0.4 % given caution with the start of the corporate earnings season for the December quarter. There were also minimal changes in Europe. Australia’s ASX 200 marginally fell by -0.3% for the week. 
• US earnings reporting season commenced with Alcoa the first major company to report. Alcoa provided signs of optimism, expecting growth in aluminium demand to reach 8% in 2013. A mild US earnings season is expected with annual profit growth of circa +2% anticipated.

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.

The post Weekly economic and market update appeared first on AdviserVoice.

• This is bigger than Tropical Storm Irene last year but far less than Katrina in 2005 which cost $US113bn.
• Disruption to transport, shopping, production, etc, suggests that 0.2% or so will be cut from October /
  November activity indicators and maybe December quarter GDP growth. However, this will be more than offset by rebuilding and demand catch-up, with March quarter GDP growth likely to be boosted by 0.3% of more.
• In Europe, a threat by former PM Berlusconi to bring down the Monti Government caused some consternation but it’s unlikely to be acted on as Berlusconi only has an approval rating of 19% amongst Italians versus 60% for Monti. Meanwhile an Italian bond auction went off well.
• In Australia, there was debate that the RBA had intervened to bring the $A down. However, a speech by Deputy Governor Lowe suggested this was not the case and that $A was some way from the threshold for intervention.

Major global economic releases and implications

• US economic data was better than expected with the highlight being much stronger than expected employment growth and a further improvement in the ISM manufacturing conditions index for October. The 171,000 gain in a payrolls is still less than the 200,000 monthly jobs growth the Fed would probably like to see, but its heading in the right direction. What’s more data for personal spending, house prices, consumer confidence and construction all rose and a Fed survey of banks showed a further easing in lending standards.
• The US earnings reporting season is 75% complete. 63% of companies have exceeded earnings expectations and earnings growth is coming in flat. The bad news remains that less than 40% of companies are beating on revenue and outlook statements remain poor so earnings expectations are being revised down. Earnings normally lag economic growth and so should start to improve as economic growth picks up.
• Euro-zone consumer sentiment rose slightly in October but business sentiment fell consistent with an ongoing recession. An ECB survey of banks also reported a further tightening in bank lending standards and Euro-zone unemployment rose further to 11.6% in September with even German employment falling. All of this highlights the need for easier monetary conditions across Europe generally.
• Japanese economic data remains poor with a sharp fall in industrial production, a fall in a manufacturing PMI for October, continued falls in household spending and weakness in the ratio of job openings to applicants. Reflecting this and ongoing price deflation the Bank of Japan announced a further 11 trillion Yen expansion in its quantitative easing program, but it continues to fall short of what is required.
• I have just spent a few days in China. While its a big country and its dangerous to draw conclusions from just one city, I struggled to find any sign of a hard landing. Beijing remains very busy and those I spoke to were of the view that growth was bottoming. The flow of data continues to suggest that this is the case with acceleration in industrial profits and sales and in the National Bureau of Statistics’ leading and coincident indicators in September and a further improvement in manufacturing PMIs for October. Meanwhile the PBoC is providing ongoing monetary stimulus by pumping record amounts of liquidity into the Chinese money market.
• In Korea, industrial production rose in September and exports rose for the third month in a row in October adding to confidence that growth may be bottoming. India’s manufacturing PMI rose marginally in October and the central bank cut bank cash reserve ratios in order to boost lending.

Australian economic releases and implications

• In Australia building approvals rose solidly for the second month in a row and monthly credit growth accelerated slightly suggesting that interest rate cuts are getting some traction. However, the strength in building approvals was concentrated in apartments which are normally volatile with private house approvals tracing out only a mildly rising trend, credit growth remains very weak and new home sales fell again in August. What’s more the manufacturing PMI remains in the weak range it has been in for some time, home prices fell 1% in October and export prices fell another 6.4% last quarter, highlighting a loss of national income. This all suggests that interest rates have not yet fallen enough to be confident that non-mining demand will offset a loss of momentum in mining activity over the year ahead. In other words interest rates will need to fall further. A benign reading for September quarter producer prices suggests inflation is no barrier to further rate cuts.

Major market moves

• Global shares rose helped by better than expected economic data with strong gains in Europe and China, but US shares up only marginally on pre election nerves and worries about the impact of Hurricane Sandy. Australian shares fell slightly, possibly reflecting profit taking after a 2.9% gain in October when US shares fell. 
• Commodity prices eased as did the $A. Bond yields fell slightly in major countries & rose slightly in Spain & Italy.

What to watch over the week ahead?

• In the US, it will be a quiet week on the data front with the non-manufacturing ISM to be released Monday, but the main event will be the US elections on Tuesday. Current polls suggest a close result. A Romney victory with Republicans taking the Senate and retaining the House would likely see share markets rise very strongly given Romney’s market friendly policies and that such an outcome would boost confidence that relatively quick solutions would be found to America’s fiscal cliff, debt ceiling and long term budget deficit problems. However, the more likely scenario is a continuation of the status quo in terms of divided government with the President’s partly not having control of Congress. The fiscal cliff will ultimately be solved as US politicians have never purposely plunged the economy into recession but it may involve a bit of uncertainly along the way.
• In China, the Communist Party Congress that will resolve the leadership transition will get underway on November 8th. This is likely to last about six days so don’t expect any quick announcements. While it probably won’t lead to any significant changes – at least not initially – it will help remove a degree of uncertainty that has been hanging over China. Chinese economic data for October will also be released Friday and is expected to add to evidence that Chinese economic growth has bottomed. Inflation is likely to have remained benign helped by falling food prices.
• In Europe, the ECB (Thursday) is expected to cut interest rates by another 0.25% to provide a further boost to the economy, but given that such a move is largely symbolic it should really be embarking on another round of quantitative easing. The European composite business conditions PMI for October will be released Tuesday and will likely confirm an ongoing mild recession. The Greek parliament is also likely to vote on further austerity and reform measures necessary to unlock its next bailout payments, possibly on Wednesday.
• The Bank of England will be watched to see whether the current round of quantitative easing will be extended.
• In Australia, the Reserve Bank is expected to cut the cash rate by another 0.25% taking it to 3% on Tuesday. So far the response to lower interest rates from readings for confidence, retail sales, credit, etc, has been far less than normal suggesting that, to be confident growth in non-mining activity will be sufficient to plug the gap left by the slowing mining boom over the year ahead, interest rates still need to fall further. However, higher than expected September quarter inflation means it’s a close call as to whether the RBA will cut on Tuesday as we expect or wait till December. Ultimately though we still see the cash rate falling to 2.5% next year. The RBA’s monetary policy statement on Friday will also be watched closely for clues regarding interest rates.
• On the data front in Australia, expect retail sales to remain softish and the trade deficit to remain wide (both Monday), September quarter house prices (Tuesday) to record a 0.5% gain and employment to have gained 5000 in October (Thursday) resulting in a rise in the unemployment rate to 5.5%.

Outlook for markets

• Global shares have been in correction mode since mid September. Given uncertainties regarding the US election and fiscal cliff, earnings downgrades, Spain, Greece and the Chinese leadership transition this may have a bit further to run. However, the rising trend in shares is likely to remain in place. Shares are cheap relative to bonds, 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 getting an added impetus from 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 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 for the $A.

The post Weekly economic and market update appeared first on AdviserVoice.

> 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.

The post Weekly market and economic update appeared first on AdviserVoice.

• Chinese economic growth rose to 2.2% in the September quarter and indicators for retail sales, industrial production, investment, money supply and exports accelerated in September
• US housing and retail sales suggest US growth may be picking up; Brazil seems to be accelerating again
• business conditions PMIs in most major countries/regions are showing signs of bottoming
• exports improved in Korea, Taiwan and Singapore.

As we saw on Friday in the US and Europe though, global shares are still being weighed down by soft earnings. But its worth noting profits often lag a turn in growth.

• The EU leaders’ summit didn’t make a lot of progress but wasn’t expected to either. However, it did reconfirm the establishment of a common bank supervisor starting from January 1 and praise for Greece adds to confidence its on track to receive its delayed aid payment next month. Debate continues on moving towards a fiscal union. Meanwhile, Spain looks to be getting close to applying for a precautionary credit line, to be used if needed, in return for agreeing to fiscal discipline which would then bring into play ECB buying of its bonds.
• October 19th marked the 25th anniversary of Black Monday when US shares fell 20% in the October 1987 share market crash and October 20th marks the 25th anniversary of Black Tuesday when Australian shares fell 25% in one day as part of a total 50% slump spread over two months. Such an event is most unlikely now as the 1987 crash followed several years of very strong gains whereas shares today are still recovering from the GFC collapse with the Australian share market still 33% below its all time high reached in November 2007.
• What is worth noting though is that it wasn’t till late 1996, ie 9 years after the 1987 high that Australian shares sustainably broke to new highs. Similarly it was almost 10 years until shares in the 1970s broke sustainably above their January 1970 high, with of course a 59% slump in 1973-74 along the way. The message seems to be that after 50% or so slumps it can take a long while to regain previous highs. Given these experiences, and bearing in mind that Australian shares fell 55% in the GFC, it’s not unusual that 4 years after the pre GFC high we still have a long way to go to regain it. That’s the bad news. The good news though is that once the 50% or so slump is out of the way shares trended higher providing good returns from the bear market lows until the highs are regained, viz a 12% pa return after the 1987 crash and 28% pa return after the 1974 slump.

Major global economic releases and implications

• Chinese economic data for September adds to confidence that Chinese economic growth is bottoming. While year on year GDP growth slowed to 7.4% in the September quarter from 7.6% in the June quarter, quarterly growth rose to 2.2% from 1.8% in the June quarter. What’s more momentum for retail sales, fixed asset investment, industrial production and rail freight all picked up in September which is consistent with earlier reported gains in exports, money supply growth and manufacturing PMIs. In particular it looks like infrastructure investment is picking up after a soft patch earlier this year. Growth in China looks to be consistent with the Government’s and our own forecast for 7.5% growth this year. At the same time inflation remains benign having fallen back to 1.9% in September. Overall a good set of numbers for China. Growth is well down from previous double digit levels but appears to be at least stabilising at a strong level without the crash the China doomsters continue to wheel out. Given this, policy stimulus is likely to remain mild and gradual, but with inflation at just 1.9% in September there is plenty of scope to ease more aggressively if need be.
• US economic data suggests growth is picking up pace. While unemployment claims backed up in the past
  week, retail sales rose 1.1% in September following strong gains in previous months, industrial production rose more than expected, manufacturing conditions indexes in the New York and Philadelphia regions improved, leading indicators rose and the housing recovery is going from strength to strength with a 15% gain in housing starts and rises in permits to build homes, improved home builder confidence and rising weekly mortgage applications point to more strength to come. The US housing recovery is hugely significant. The housing slump was the trigger for the GFC and its upturn now could directly contribute 0.5% plus US growth over the year ahead as well as indirectly boosting growth via wealth effects. That housing indicators are continuing to recover at a time of “worries” over the fiscal cliff is a good sign. Maybe the fiscal cliff is the latest incarnation of the Y2K scare.
• US earnings reports were a little stronger over the past week, with 60% of results now better than expected, up from 57% a week ago. But there were key disappointments from large stocks such as Microsoft, GE and McDonalds. September quarter profit growth may come in flat versus expectations for a 2% fall three weeks ago.
• Global monetary easing continued with both Thailand and Turkey cutting interest rates.

Australian economic releases and implications

• The minutes from the last RBA Board meeting reinforced the Bank’s easing bias with concerns that Australian economic growth will be weaker than forecast as the mining boom peaks earlier than expected. The minutes are consistent with our view that interest rates will be cut another 0.25% on Melbourne Cup day, and that the cash rate will fall to 2.5% early next year. While housing finance edged up in August, the uptrend and level of finance remains very weak and consistent with the need for more interest rate cuts.

Major market moves

• Global share markets rose over the week, up 0.3% in the US and up 2.4% in Europe, helped by better data in the US and China and optimism Spain will seek support. However, disappointing earnings results saw the gains reduced on Friday. In a broader sense global shares are still in the correction that has been underway since mid September. Australian shares rose to a 15 month high helped by the continuing impact of RBA rate cuts.
• Bond yields generally rose, except in Spain and Italy, on reduced safe haven buying.
• The “risk on” tone in markets also saw the $A rise 0.9% helped by slightly higher commodity prices.

What to watch over the week ahead?

• In the US the Federal Reserve’s monetary policy meeting (Wednesday) is not likely to announce any changes to monetary policy with open ended quantitative easing just getting underway. The market focus is more likely to be on how the Fed sees recent economic indicators, including the fall in unemployment and the housing recovery, and what this means in terms of the duration of QE3. On the data front expect new home sales and house prices (both Wednesday) and pending home sales (Thursday) to show modest growth, durable goods orders (Thursday) to bounce back after a sharp fall in August and September quarter GDP growth (Friday) to rise at a still subdued annualised pace of 1.7%. The US earnings reporting season will also continue.
• In Europe, business conditions PMIs (Wednesday) are likely to show ongoing evidence of stabilisation around levels consistent with a mild recession. In Japan. CPI data (Friday) is likely to show continued deflation.
• In China, HSBC’s flash manufacturing PMI (Wednesday) will be watched for further signs of stabilisation.
• In Australia, the main focus will be on September quarter inflation data (Wednesday) which we expect to show a 1.1% rise taking the annual inflation rate to 1.7%, up from 1.2% year on year in the March quarter. The main drivers of the rise in inflation are expected to be higher prices for fruit and vegetables and electricity costs partly due to carbon pricing. The carbon price is expected to have added around 0.3% to inflation and the RBA’s underlying measures of inflation are expected to have remained benign at around 0.6% in the quarter or 2.2% year on year, reflecting the continuing tough pricing environment. The likely benign underlying inflation outcome is expected to leave plenty of room for more interest rate cuts ahead. The Federal Government’s Mid Year Economic and Fiscal Outlook might also be released and will likely show the impact of slowing growth and weaker commodity prices on the budget. Any further fiscal tightening to keep the budget on surplus this year will only add to the pressure on the RBA to cut interest rates further.

Outlook for markets

• Global shares have been in correction/consolidation mode since mid September after strong gains since early June. Given uncertainties regarding the global outlook this may have a bit further to run. However, the broad rising trend in shares is likely to remain intact. 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 boost 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. With shares remaining cheap we see further gains into year end. If there is a setback in the weeks ahead it should be seen as a good buying opportunity.
• While sovereign bonds in safe countries are a good diversifier, bond yields in major countries are very low and point to low medium term bond returns. Corporate debt is a better proposition for those after income.
• The short term outlook for the $A is messy. US QE3, foreign central bank buying and prospects for improved global growth and higher commodity prices into next year are positive. But against this, uncertainties regarding China and ongoing RBA rate cuts are negatives. The likely outcome is for a volatile range of between $US0.95 to $US1.10, with the risk on the downside. We have probably seen the best for the $A.

The post Weekly economic and market update appeared first on AdviserVoice.

• 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. 

The post Weekly economic & market update appeared first on AdviserVoice.

After committing to do whatever it takes to defend the euro a month ago, the ECB has delivered broad details about how this will work with the key elements of its plan (called Outright Monetary Transactions or OMT) being:

• unlimited secondary market bond purchases by the ECB out to 3 year maturities
• the ECB will not rank senior to other investors; no formal announced yield target, but the ECB clearly has objectives in mind
• bond buying conditional on a country applying for assistance to the Euro-zone bailout funds and agreeing and abiding by its requirements; and any bond buying to be sterilised, ie, it won’t be quantitative easing.

This has to be seen as very positive. Europe now has a well articulated and credible program to bring bond yields in troubled countries back to sustainable levels. The combination of the ECB acting in concert with the bailout funds effectively leverages up the firepower of the latter overcoming concerns that they don’t have enough resources.

Buying shorter term bonds should transmit the impact out to longer term yields as well – reflecting this Spain’s ten year bond yield has fallen below 6% for the first time since May. While it would have been nice to see the ECB announce quantitative easing by not sterilising its bond buying, the current program is focused on bringing borrowing costs back into line across Europe and making sure that current very easy monetary conditions apply for all of Europe and not just a few countries – QE is still likely at some point to deal with the ongoing recession. All that is now required is for countries like Spain to apply for assistance and agree to the terms, which it is likely to do soon ahead of a bond auction in October. In fact Spain has little choice but to apply because if it doesn’t its bond yields will rebound.

The bottom line is that the ECB is delivering on its commitment to defend the euro. The tail risk of a euro breakup triggering a rerun of a deep GFC style recession in Europe and potentially a global recession is receding. The ECB under Mario Draghi is very different to that under Trichet. Starting with last year’s bank funding operations and now with its bond buying program Draghi is proving to be a pragmatic man of action.

In Australia there were no surprises from the Reserve Bank which left interest rates on hold at 3.5% with the RBA continuing to see growth running around trend. However, the RBA does seem to be getting a bit more concerned about the slowdown in China and sharp falls in commodity prices.

Our assessment is that with the mining boom losing momentum led by sharp falls in iron ore prices and recent monthly indicators such as retail sales, building approvals and employment growth softening anew its likely that growth will slide below trend highlighting the need for lower interest rates.

Standard variable mortgage rates at 6.8% are still well above the 6% or so levels that were required to generate a decent recovery through the last two easing cycles into 2002 and 2009. Reflecting these considerations we expect the RBA to cut the official cash rate to 2.75% in the next six months, starting with a 0.25% cut in either October or November.

Major global economic releases and implications

• US economic data shows that growth is continuing but remains sub-par and not enough to satisfy the Fed.
  While the new Markit manufacturing conditions PMI rose marginally in August, the ISM manufacturing conditions index deteriorated slightly leaving it below 50 for the third month in a row and jobs growth of just 96,000 in August is way below the 200,000 a month need to sustainably reduce unemployment. Construction spending also fell in July and mortgage applications fell over the last week. On the positive side though the ISM nonmanufacturing conditions index rose in August and productivity growth was revised up for the June quarter.
• Final August business conditions PMIs for the Euro-zone confirmed a slight improvement in manufacturing but a slight deterioration in the services sector leaving the overall composite indicator little changed from where it’s been over the past few months, which is consistent with a mild recession in Europe.
• While China’s manufacturing PMIs fell in August, non-manufacturing conditions improved. Chinese authorities announced approvals for infrastructure spending focused on road and rail projects. While it’s not sure whether this is real stimulus or not given uncertainty over the financing or just the approval of five year plan projects that would happen anyway, it triggered a strong bounce in Chinese shares. After a 3 year 40% slump in share prices, the Chinese share market is primed for a rebound with a record low historic PE of 11 times.

Australian economic releases and implications

• Australian economic data was mostly soft. The good news was that GDP growth over the year to the June quarter was 3.7% which is well above that in most other comparable countries. However, growth in the quarter slowed to just 0.6% and going forward is likely to remain subdued as the Government handout driven boost to consumer spending looks to have run its course, non-mining sectors of the economy are still struggling and the mining boom seems to be rapidly losing momentum led by sharp falls in iron ore prices.
• Weakness was indicated in a range of indicators: with retail sales falling sharply in July; employment falling in August; job ads continuing to slide pointing to more labour market weakness ahead; the trade deficit widening in July; soft readings for manufacturing, services and construction sector conditions indicators; and company profits falling for the third quarter in a row. On balance we see growth running around 2.5% over the year ahead, which is not disastrous but still well below trend and consistent with further RBA interest rate cuts.

Major market moves

• Share markets rose as the ECB delivered details on its bond buying plan resulting in a further pricing out of the risk that the Euro-zone will blow apart triggering a global recession. Chinese and Asian shares also benefitted from infrastructure project approvals in China.
• Commodities prices also rose although the iron ore price made new lows. Renewed talk of interest rate cuts and worries about the iron ore price also saw the $A fall below $US1.02 mid week before recovering its losses.
• Bond yields rose in major countries as safe haven buying reversed, but fell sharply in Spain and Italy.

What to watch over the week ahead?

• In the US the key focus will be on the Fed’s monetary policy meeting (Thursday) where we expect the Fed to unveil more monetary easing. Given support at the last meeting for further easing unless the economy strengthened soon and Bernanke’s Jackson Hole speech which made a strong case for quantitative easing by arguing that it has worked in the past, that its costs are manageable and that unless growth improves quickly unemployment will remain too high, we expect the Fed to extend its commitment to keep rates low into 2015 and to announce more quantitative easing involving the purchase of both government bonds and mortgage backed securities. But unlike in the past where QE1 and QE2 were specified in terms of the amount and time frame, QE3 is expected to be open ended with the Fed continuing it until the economy is judged to be on a sounder footing. While the absence of a dollar value might confuse some, the lack of an end point problem and the commitment to continue until growth is stronger will be a big positive to such an approach.
• In terms of US data, it’s a quite week until Friday when we expect higher food prices drive a pick up in inflation, but core inflation to remain benign, a solid 0.5% gain in retail sales and modest growth in industrial production.
• In Europe, the German constitutional court’s ruling on the validity of the ESM bailout fund will be delivered on Wednesday and is likely to clear the fund but impose some conditions around it. Dutch elections will also be watched as another test of Euro-zone solidarity but recent polls suggest a radical antiausterity or anti-bailout result is unlikely. A Eurogroup/European finance ministers meeting on Friday may also see Spain apply for bailout fund assistance as is required under the ECB’s bond buying plan.
• Chinese August data for exports and imports (Monday) and bank lending (Tuesday) will also be released.
• In Australia, expect a modest gain in housing finance (Monday), but continued sub-par reading for business conditions and confidence in the NAB business survey (Tuesday) and for consumer confidence (Wednesday).
• In terms of consumer confidence talk of rate cuts is likely to have been offset by bleak news regarding ironore rices and a run of soft economic news. Data for June quarter dwelling starts will also be released.

Outlook for markets

• Event risk remains high for investors over the next few weeks with the Fed meeting, Spain yet to apply for
  assistance, the German constitutional court ruling, Dutch elections, and the European Union decision on Greece that may create volatility in the month ahead along with ongoing uncertainty about Chinese growth. However, with the ECB undertaking a major game changer, the Fed providing a win/win for the US share market in that either the economy improves or the Fed eases, further easing likely in China and shares cheap, we still see shares being higher by year end. It’s also a good sign that US shares have broken up to a new post GFC high. So any weakness over the next month or so will likely provide a good buying opportunity.
• While sovereign bonds in safe countries are a good diversifier, bond yields in major countries remain very low and point to low medium term bond returns. Corporate debt is a better proposition for those after income but not willing to accept the volatility that comes with shares.
• In the short term the $A is vulnerable should iron ore prices continue to fall, however, overall it should remain strong as global central banks undertake further monetary easing, commodity prices bounce back into next year and as central bank reserve diversification continues.

The post Weekly economic & market update – Super Mario (and probably the Fed) to the rescue appeared first on AdviserVoice.

• Shares and other risky assets have rallied on the hope of policy action to bring the European debt crisis under control and to boost US growth. Its coming up to crunch time and so policy makers, particularly in Europe, will now have to deliver.
• Fortunately the signs are positive that they will. Ben Bernanke’s Jackson Hole address made a strong case for more quantitative easing (ie QE3), in concluding that past quantitative easing has been effective in supporting growth, that the costs of QE are manageable and that unless growth improves quickly unemployment will remain too high. Baring a much stronger employment reading on Friday, QE3 looks to be on the way.
• Similarly in Europe, ECB President Draghi’s decision to cancel his appearance at the Jackson Hole conference on the grounds of a “heavy workload”, his comments in German magazine Die Zeit that for the ECB to fulfil its mandate it sometimes requires non-standard monetary policy tools and news that ECB governors will have about 24 hours to digest the ECB’s bond buying proposals all suggest that the ECB is on track to provide details of its plans, probably after Thursday’s ECB meeting.
• A real concern for Australia though is the ongoing slide in the iron ore price which is down by a third since June as Chinese steel producers seek to cut inventories in an environment of uncertainty regarding China’s growth. Some recovery is likely into next year as Chinese and global growth stabilises, but so far there is no sign of a bottom. If sustained it would result in a big hit to the miners and the blow to national income would be a further drag on economic growth and add to pressure on the Federal budget, which was always going to struggle to achieve a surplus this year and is already under pressure in subsequent years from large spending commitments and a possible short fall in carbon tax revenue. While the RBA is unlikely to cut official interest rates in the week ahead, our view remains that they will fall to around 3% by year end and the fall in the iron ore price and the subsequent threat to the economy only adds to our assessment that rates need to fall further.

Major global economic releases and implications

• US data remains consistent with moderate growth – okay, but still not enough to satisfy the Fed. Consumer confidence fell in August, but June quarter GDP growth was revised up to 1.7% from 1.5%, personal income and spending rose in line with expectations, a couple of business surveys pointed to improved business conditions in August, house prices rose for the fifth month in a row and pending home sales rose adding to evidence of a housing recovery, weekly retail sales rose and the Fed’s Beige Book of anecdotal evidence said the economy continues to expand “gradually”.
• European data remains consistent with a mild recession. Economic sentiment fell further in August, unemployment rose to 11.3% and German data was weak, which in some ways may be a good thing in terms of helping to solve Euro-zone debt problems as it adds pressure on the German Government to support ECB efforts. News that Catalonia will become the third Spanish region to seek financial help adds to the urgency to stabilise Spanish bond yields.
• Japanese economic data was poor with falls in machine tool orders, retail trade and industrial production against a backdrop of ongoing price deflation. Korean industrial production also fell in July.
• The news out of China also remains bleak with a further decline in industrial profits, a slump in leading indicators and further weakness in the official manufacturing conditions PMI which saw it fall from 50.1 in July to 49.2 in August. Chinese Premier Wen Jiabao appeared yet again to indicate the need for more stimulus on a visit to Guangdong, but the Chinese authorities are taking a cautious approach to providing stimulus. At least Brazil is not holding back with interest rate and tax cuts.

Australian economic releases and implications

• Australian economic data presented a mixed picture. New home sales fell 5.6% in July, building approvals fell sharply driven by a 40% fall in the volatile multi unit dwelling sector and private sector credit growth was very weak in July. Against this though business investment was up 3.4% in the June quarter and investment intentions for 2012-13 still point to another strong year of investment growth largely driven by mining investment. But while investment plans are still pointing to 40% growth in mining investment this year, they do appear to be topping out – consistent with an end to the mining investment boom in a year or two – whereas investment plans in manufacturing and other industries were upgraded.
• The Australian June half profit reporting season is now complete. In the final analysis earnings per share fell by around 2% over the last financial year driven by a roughly 17% fall in the resources sector on the back of lower commodity prices, capex spend and cost blowouts but modest positive growth for banks (+1%) and industrials (+6%). Overall results were much better than feared. 35% of results came in better than expected which is below the norm of 43%, but up from just 22% three weeks ago and up from 31% in the last reporting season. But only 15% of companies came in worse than expected, which is down from 23% in the last reporting season.
• Consistent with this, 52% of companies saw their share prices outperform the market on release day. 67% of companies have seen profit gains on a year ago and the biggest surprise is that outlook statements are mildly positive on balance (bottom right chart). Nevertheless, bottom up consensus estimates for 2012-13 profit growth have fallen to 8% from 10% a month ago as analysts used the cover of the reporting season to revise earnings growth estimates to more realistic levels. These estimates are likely to be revised down still further as the slump in iron ore prices weigh on expectations for a rebound in resources profits.
• A key theme was the bounce back in previously sold down cyclicals that delivered against expectations, eg, Bradken, JB HiFi, Downer EDI, Hills, AMP, Wesfarmers, Breville, Qantas and Aristocrat. Against this, there has been some underperformance in the more expensive defensives such as Telstra. A clear positive was the strength of dividends with only 19% of companies having cut dividends with 63% raising them, highlighting the
  determination of companies to maintain or raise dividends despite weaker profits.

Major market moves

• Share markets fell for the second week on ongoing concerns regarding the global growth outlook and nervousness ahead of Ben Bernanke’s address at Jackson Hole and the ECB’s meeting in the week ahead. US and European shares recovered some of their losses after Bernanke’s address though.
• Chinese shares are particularly weak having fallen to their lowest level since early 2009.
• The return of investor caution also saw commodity prices fall and a sharp fall in the $A as iron ore prices continued to slide.
• Bond yields backed up in Spain and Italy as Spain awaits more information in terms of what is on offer in terms of support before asking for it. Bonds rallied in the US, UK, Germany and Australia on safe haven buying.

What to watch over the week ahead?

• In Australia, the Reserve Bank is expected to leave interest rates on hold following its meeting Tuesday. Recent statements from the Reserve have indicated it is comfortable with current interest rate settings for now with growth seen around trend and inflation close to target but rates a bit below their long term average to balance the downside risks globally. Not enough has happened since the last meeting to change this assessment. Our view remains that the cash rate will still fall further but it may not be till closer to Christmas.
• On the data front in Australia: anecdotes point to a fall in July retail sales (due Monday) after Government handouts boosted spending in May and June; expect job ads (Monday) to remain soft; June quarter GDP growth (Wednesday) is expected to come in around 0.6 % (or 3.6% year on year) thanks to solid retail sales, investment and net exports; and August employment (Thursday) is likely to fall 10,000 pushing unemployment to 5.3%. Data for business indicators, house prices, AIG PMIs and trade will also be released.
• The ECB meeting on Thursday will be looked to for more details on the ECB’s bond buying plan. Recent signs suggest that the ECB is on track to provide details on Thursday but there is still some risk that it may chose to hold back till after the German constitutional court’s ruling on the validly of the ESM bailout fund on September 12. And whether the ECB buys bonds with the existing EFSF bailout fund or the ESM it won’t do anything until Spain and/or Italy apply to the bailout fund for assistance. It’s also possible that the ECB will announce another 0.25% cut in its key policy rate taking it to 0.5%.
• In the US, the key ISM manufacturing conditions survey (Tuesday) and payroll employment data (Friday) will be watched closely as guides to whether the Fed will provide more stimulus following its meeting on September 13. The ISM is likely to remain around the 50 level indicating continued but sub-par growth and employment is likely to rise by 120,000, neither of which are likely to be enough to satisfy the Fed and so will likely be interpreted as consistent with the Fed providing more stimulus, involving at least an extension of its low rates commitment into 2015 and probably more quantitative easing.
• Chinese inflation and activity data for August will be released on Sunday the 9th of September and are likely to show inflation rising to around a still very low 2% on the back of higher food prices but non-food inflation remaining at 1.5% and continued softness in activity indicators. This should all be consistent with further policy stimulus by the Chinese authorities but the pace of easing is likely to remain slow.

Outlook for markets

• After 10% plus gains between early June and about two weeks ago, shares remain vulnerable to a further short term setback on the back of worries about global growth and given the range of events in the US and Europe (ECB meeting, German constitutional court ruling, Dutch elections, Fed meeting and the European Union decision on Greece) that may create volatility in the month ahead. However, with the ECB on the brink of a major game changer, the Fed providing a win/win for the US share market in that either the economy improves or it eases, further easing likely in China and shares cheap, we remain of the view that shares will be higher by year end. As such any weakness over the next month or so will likely provide a good buying opportunity as the broader trend from June remains up.
• While sovereign bonds in safe countries are a good diversifier, bond yields in major countries remain very low and point to low medium term bond returns. Corporate debt is a better proposition for those after income but not willing to accept the volatility that comes with shares.
• In the short term the $A is vulnerable should iron ore prices continue to fall, however, overall it should remain strong as global central banks undertake further monetary easing, commodity prices bounce back into next year and as central bank reserve diversification continues.

The post Weekly economic & market update appeared first on AdviserVoice.

• This may now be getting underway with share markets down slightly over the past week. There are plenty of potential triggers with ongoing worries about China and a range of events across the US and Europe that may create volatility. These include Fed Chairman Bernanke’s Jackson Hole address on Friday, the ECB’s meeting on September 6, the German constitutional court’s ruling on the validly of the ESM bailout fund on September 12, the Dutch election on September 12, the Fed’s next meeting on September 13, a decision on whether Greece continues to get funding and whether Spain and maybe Italy apply for assistance. It’s looking increasingly likely that Greece will get more time to adjust but that we may not get the full details of the ECB’s bond buying plan till mid September.
• The cancellation or delay of various marginal resource projects in Australia, such as the Olympic Dam expansion or Peak Downs, are bad news for the workers and communities directly involved but for the country as a whole should really be seen as good news. There is still a huge pipeline of resource projects yet to be completed over the next few years so the actual peak in mining investment probably won’t be seen until in 2013-14. However, it has long been known that doing all the approved and proposed projects in a relatively short period of time was not going to be possible. The delays will help spread the projects into the longer term, help take pressure of excessive costs, reduce the size of the commodity supply surge over the decade ahead thereby helping to support commodity prices and provide breathing space for other sectors of the economy such as construction, retailing, manufacturing and tourism to grow and invest probably with the help of lower interest rates. In other words the end of the mining investment boom should lead to a more balanced economy with more growth coming from the non-mining parts of the economy that have been under the screw for the last few years and from export volumes which should start to flow from the completed projects.

Major global economic releases and implications

• US data remains consistent with continued modest growth. Home sales rose in July, albeit with new home sales constrained by a lack of supply, house prices rose for the fifth month in a row and the Markit flash PMI manufacturing conditions index rose slightly to 51.9 in August. Against this jobless claims edged higher and core durable goods orders fell.
• The US Congressional Budget Office released yet another report highlighting that if the currently scheduled fiscal cutback at the start of next year is not modified it will likely knock the economy into recession. US politicians are well aware of the issues and will do something about it but probably not until after the November elections, leaving plenty of room for uncertainty in the meantime.
• The good news though is that the Fed is also aware of the problem and more importantly the minutes from its last meeting highlight that unless the economy picks up pace further monetary stimulus will be forthcoming and Fed Chairman has told Congress that he sees scope for more easing. This could take the form of extending the commitment to keep rates low into 2015, a cut to the interest rate on bank reserves, some sort of “funding for lending” operation or more asset purchases, ie QE3. Additional stimulus is almost certain to be announced at the Fed’s mid September meeting.
• Euro-zone PMI business conditions indicators were stable in August with a slight fall in services conditions offset by an improvement in manufacturing and remain at levels consistent with a mild recession. We continue to expect a 1% contraction in Euro-zone GDP this year, which is still a bit worse than consensus expectations.
• A deepening slump in Japanese exports adds to the picture of slowing global trade.
• In China, the HSBC’s flash manufacturing conditions PMI fell in August. While it remains stuck in the same range its been in since late last year its failure to improve highlights the need for more policy stimulus. It’s interesting to note the Chinese central bank has injected record funds into the money market suggesting a preference for this over rate cuts and reserve ratio cuts and three cities have announced “stimulus” packages.

Australian economic releases and implications

• In Australia the minutes from the RBA’s last board meeting and parliamentary testimony from Governor Stevens just reinforced the position that given the downside risks to global growth but with Australian growth around trend and inflation expected to be around target, the RBA is comfortable with current interest rate settings for now. We still see more rate cuts but it may not be for a few months. Its also clear from question time that Governor Stevens is rightly not keen on intervening to cap the $A at this point partly on the grounds that its not particularly overvalued and its not clear that it would have much impact.
• Data releases were mixed with skilled job vacancies softening but the Westpac/Melbourne Institute’s leading indicatory picking up in June and housing affordability continuing to see a modest recovery in the June quarter.
• The Australian June half profit reporting season is now 80% complete and the results are much better than feared and much better than was the case a few weeks ago. 33% of results have now come in better than expected which is still well down on the norm of 43%, but its up from just 22% two weeks ago and the proportion coming in worse than expected has fallen to 16% from 35% two weeks ago. Consistent with this 52% of companies have seen their share prices outperform the market on release day. 69% of companies have seen profit gains on a year ago and the biggest surprise is that outlook statements are mildly positive on balance (bottom right chart). 2011-12 earnings per share growth is likely come in around -3% which is little changed from expectations a month ago, but bottom up consensus estimates for 2012-13 profit growth have edged down by around 2 percentage points, but this is mainly due to analysts using the cover of the reporting season to revise down previously unrealistically high expectations for around 10% profit growth.
• The main themes have been expensive defensives underperforming if they deliver ok to sub-par results, but sold down cyclicals getting heavily rewarded with share price gains if they are better than feared (notably Bradken, JB HiFi, Downer EDI, Hills, AMP, Wesfarmers, Breville, Qantas). The resources sector is seeing a sharp 15% fall in profits for 2011-12 on lower commodity prices, capex spend and cost pressures, but the banks and nonfinancial industrials are seeing modest growth. So far only 18% of companies have cut dividends with 62%
  raising them, highlighting the determination of companies to maintain or raise dividends despite weaker profits.

Major market moves

• Most share markets had a pullback on worries about Chinese growth and whether policy makers in Europe would get their debt problems under control. Australian and US shares fell 0.5% and European shares fell 1.8%.
• Commodity prices were mixed with base metals and gold up on QE3 speculation, oil unchanged and the iron
  ore price continuing to fall on China worries.
• Bond yields in major countries reversed some of their recent back up, partly in response to talk of QE3
  which involves buying US bonds. Spanish and Italian bond yields continued their fall.

What to watch over the week ahead?

• In the US, the big focus for investors will be Fed Chairman Bernanke’s address to the annual gathering of central bankers in Jackson Hole to see whether he foreshadows QE3, much as he did with QE2 in 2010. Our assessment is that with recent economic readings improving a bit, he is unlikely to commit to anything specific but rather simply reiterate and maybe expand upon his assertion that there is still more that the Fed can do and that it stands ready to act if economic conditions don’t continue to improve. On the data front expect the Case-Shiller house price index to show a further modest gain in June (due Tuesday), a solid bounce back in pending home sales (Wednesday), June quarter GDP growth to be revised up to 1.9% from the 1.5% pace initially reported (Wednesday). The Fed’s Beige book (Wednesday), personal income and spending data (Thursday) and consumer sentiment data (Friday) will also be released.
• In Europe economic sentiment indicators (Thursday) will likely confirm that its recession continues.
• Chinese manufacturing conditions PMIs will be released on Friday and will likely remain subdued.
• In Australia, most interest will be on the June quarter data construction activity (Wednesday) and capital spending (Thursday) with both likely to show modest gains after the huge surge reported in the March quarter.
  The capital spending data will also be watched for any slowing in capex plans consistent with recent talk of a peak in the mining investment boom and projects delays. July Building approvals (Thursday) are expected to fall by 3%. Expect only modest gains in new home sales (Tuesday) and private credit (Friday).
• The Australian profit reporting season will wrap up with around with 35 major companies reporting including Caltex, Aristocrat, Virgin Australia, Transfield, WorleyParsons and Perpetual.

Outlook for markets

• After 10% plus gains since early June shares have become a bit overbought and vulnerable to a short term setback on the back of worries about global growth and given the range of events in the US and Europe that may create volatility in the month ahead. However, with the ECB on the brink of a major game changer, the Fed providing a win/win for the US sharemarket in that either the economy improves or it eases, further easing likely in China and shares cheap we remain of the view that shares will be higher by year end. As such any weakness over the next month or so will likely provide a good buying opportunity as the broader trend from June remains up.
• While sovereign bonds in safe countries are a good diversifier, bond yields in major countries remain
  very low and point to low medium term bond returns. Corporate debt is a better proposition for those after
  income but not willing to accept the volatility that comes with shares.
• Apart from normal volatility, the $A is likely to remain strong as global central banks undertake further
  monetary easing, commodity prices hold up and as central bank reserve diversification continues.

The post Weekly economic & market update appeared first on AdviserVoice.