Global equities made new highs last week as bond yields receded. The Australian dollar was weaker after a relatively soft GDP report, while US employment data was open to interpretation.
Bitcoin surpassed the US$100,000 threshold after a new SEC chair was selected.
The European and Swiss central banks are expected to cut rates this week, while the RBA is expected to hold tomorrow ahead of an anticipated rise in unemployment on Thursday. US CPI is expected to be slightly firmer on Wednesday.
Market performance was somewhat mixed last week. Global equities made gains with the MSCI World ex-Australia hedged and unhedged indices finishing the week at new closing highs. The S&P/ASX300 made a new high before receding along with the Australian dollar after a surprisingly soft GDP report. Interest-sensitive sectors slipped despite lower bond yields, which included a -0.11% drop in the Australian 10yr yield.
The Australian economy grew by just +0.3% in inflation-adjusted terms during the quarter and just +0.8% over the year to September. A record level of public investment supported GDP. But consumer spending was unchanged as some energy expenditure was transferred to the public sector via the electricity subsidies. There was also a modest rise in the savings ratio, suggesting that the tax and energy savings are partly allocated to restoring household balance sheets. However, a surprisingly good +0.6% rise in October retail sales indicated that the fourth quarter got off to a better start as Australians took advantage of early Black Friday sales.
The interest rate market responded by pricing a 55% chance of an RBA rate cut in February, with at least one expected by the end of April. However, productivity growth of -0.8% over the last year is far off the +1.0% that the RBA sees as necessary to keep the wage increases of +3.5% consistent with the 2%-3% inflation target. The Board is expected to hold policy steady at tomorrow’s meeting, and the governor may continue with her more balanced outlook.
The market expects the Federal Reserve to cut rates by -0.25% at the next meeting in two weeks, which would effectively bring the US and Australian rates to the same 4.35% level.
Last week, Fed Chair Jerome Powell said, “I feel very good about where the economy is and where monetary policy is [...] The U.S. economy is in very good shape and there’s no reason for that not to continue [...] The downside risks appear to be less in the labour market, growth is definitely stronger than we thought, and inflation has come in a little higher. So, the good news is that we can afford to be a little more cautious as we try to find neutral.”
November CPI inflation is expected to be +2.7% yoy when released on Wednesday this week, up from +2.6% yoy in October. Core CPI is expected to remain at +3.3% yoy.
The Fed’s Beige Book also provided a relatively upbeat assessment last week compared to recent months: “Economic activity rose slightly in most Districts. Three regions exhibited modest or moderate growth that offset flat or slightly declining activity in two others. Though growth in economic activity was generally small, expectations for growth rose moderately across most geographies and sectors. Business contacts expressed optimism that demand will rise in coming months. Consumer spending was generally stable. Many consumer-oriented businesses across Districts noted further increases in price sensitivity among consumers, as well as several reports of increased sensitivity to quality”.
The assessment was supported by a pick-up in the ISM Manufacturing survey’s new orders sub-index. However, this may be partly due to the pre-tariff “front-loading” suggested by the S&P Global PMI reports since the post-election optimism in Services has faded surprisingly quickly.
On the labour markets, the Beige Book said: “Employment levels were flat or up only slightly across Districts. Hiring activity was subdued as worker turnover remained low and few firms reported increasing their headcount. The level of layoffs was also reportedly low. Contacts indicated they expected employment to remain steady or rise slightly over the next year, but many were cautious in their optimism about any pickup in hiring activity. Wage growth softened to a modest pace across most Districts, as did expectations for wage growth in coming months. Job growth and wage growth for entry-level positions and skilled trades were an exception, rising robustly and expected to grow further through next year.”
According to Friday’s BLS labour report, the economy added +227k new non-farm payrolls in November, modestly exceeding expectations and suggesting a bottoming out in employment trends. However, October’s very weak +12k number was left essentially unchanged, with two-month prior revisions totalling just +56k. The softness in the October report was assumed to have been due to the Boeing strike and hurricanes. Friday’s data did not necessarily alter that view, but seasonal factors could also have led to an overstatement in the November report, implying weaker underlying conditions. The payroll figures were at odds with the much softer household survey and the rise in the unemployment rate to 4.2%. Moreover, the JOLTS report indicated very weak hiring, a much more reliable indication of future conditions and reconciling better with the Beige Book findings.
It was a turbulent week in geopolitics. The recently-elected French government crumbled in a vote of no confidence, the South Korean government declared martial law only to see legislators overturn the decision within hours, and rebel troops retook large parts of Syrian territory, pushing the Russian-backed Assad regime to the brink of collapse.
China retaliated against the recent chip export bans by banning the export of germanium and gallium to the US. The automotive and solar panel industries are among those affected, although no significant impacts are anticipated in the short term.
Bitcoin surpassed the psychological barrier of US$100,000 after President Trump picked the crypto-friendly Paul Atkins to replace Gary Gensler as SEC chair. He previously served as SEC commissioner between 2002 and 2008.
Besides tomorrow’s RBA meeting, the European Central Bank and Swiss National Bank will meet on Thursday. Both are expected to cut rates by either -0.25% or -0.50%.
The NAB Business surveys will also be published tomorrow, with Australian unemployment also expected to rise by +0.1% to 4.2% when released on Thursday. Chinese inflation figures are due out later today.
Significant Upcoming Data:
| Monday | Tuesday | Wednesday | Thursday | Friday |
Australia |
| RBA Meeting; NAB Business Surveys
|
| Employment |
|
US | NFIB Small Bus. Opt.; NY Fed. 1yr Infl. Exp.; WSale Trade & Inventories
| Unit Labour Costs & Productivity | CPI; Real Ave. Earnings; Fed. Budget Balance; MBA Mortgage Apps.
| PPI; Household Change in Net Worth; Weekly Jobless Claims
| Import & Export Prices |
Europe | Norwegian PPI; Danish Curr. Acc.; Swiss SECO Cons. Conf.; EZ Sentix Investor Conf.; Irish Ind. Prod.; Swedish SEB House Price Indic.
| German, Dutch, Danish & Norwegian CPI; Italian, Finnish & Austrian Ind. Prod.; Swedish Ind. Orders & GDP Indic.; Dutch Ind. Sales & Manuf. Prod.
|
| ECB & SNB Meetings; [German Curr. Acc.]; Swedish CPI & PES Unempl.; Italian Quarterly Unempl.; Irish CPI; Dutch Trade; UK RICS House Prices
| EZ Ind. Prod.; UK Ind. Prod., Trade, Monthly GDP, Constr. Output, Index of Serv. & GfK Cons. Conf.; French & Spanish CPI; German Trade & WSale Prices; Swedish Unempl.; Finnish CPI & Curr. Acc.
|
Japan | Trade & BoP Curr. Acc.; Eco Watchers Surveys; Q3 GDP (F)
| M2 / M3 Money Supply; Machine Tool Orders | PPI; BSI Q4 Survey | Tokyo Office Vacancies | Tankan Survey; Ind. Prod.
|
China | CPI & PPI; [M0 / M1 / M2 Money Supply]
| Trade | [FDI] |
|
|
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