The Experts

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Shane Oliver
Financial markets
+ About Shane Oliver

Shane Oliver is head of investment strategy at chief economist at AMP Capital.

US GDP and Eurozone confidence

Monday, May 25, 2015

By Shane Oliver

What to watch over the next week?

In the US, March quarter GDP growth (Friday) may be revised down to -0.9% annualised from +0.2%. However, there is greater than normal confusion around this, as it appears that the Bureau of Economic Analysis’ seasonal adjustment process is understating March quarter GDP growth and a re-adjustment would put it around +1.8% annualised. As a result the BEA has indicated that it is looking into this. In other data, expect a slight improvement in underlying durable goods orders, continued strength in home prices, a rebound in new home sales (all due Tuesday), a further gain in pending home sales (Thursday) and a rise in consumer sentiment (Friday) should all help allay fears that the US economy has slowed too much.

Eurozone confidence data for May (Thursday) will be watched for evidence that the pick-up in Eurozone growth is being sustained. And of course, progress towards a “reform for funding deal” with Greece will be watched very closely given Greece is now close to crunch time.
In Japan, expect to see labour market indicators remain solid, a slight improvement in household spending and a bounce in industrial production, but inflation to fall back to only just above zero as the sales tax hike a year ago falls out of the annual inflation figures (all Friday).

In Australia, expect to see a 1% fall in both March quarter construction activity (Wednesday) and business capital expenditure (Thursday) driven by the ongoing slide in mining investment. The key thing to watch will be business investment plans for any signs of an improvement in the outlook for non-mining investment. Data for new home sales and private credit will also be released Friday. Clues on the interest rate outlook will be watched for with RBA officials Lowe and Edey both speaking.

Outlook for markets

Given the uncertainties around the bond sell off, the Fed and Greece the next few months could remain volatile for shares. However, notwithstanding near term risks, the conditions for an end to the cyclical bull market in shares are still not in place: valuations against bonds remain good; economic growth is continuing at a not too cold but not too hot pace; and monetary conditions are set to remain easy. As such, share markets are likely to see another year of reasonable returns. My year-end target for Australian shares remains 6000. It’s just that the market got ahead of itself with the surge earlier this year and it’s been working it off ever since.

Still low bond yields point to soft medium term returns from bonds, but it’s hard to get too bearish on bonds in a world of too much saving, spare capacity and deflation risk. Central banks won’t be ratifying a bond crash like in 1994.

Despite the risk of a further short term bounce in the $A – possibly up to the 200-day moving average around $US0.83 - the broad trend is likely to remain down as the Fed is still likely to raise rates later this year whereas the RBA retains a mild easing bias (which is likely to turn into an easing if the $A doesn’t soon head back down) and the long term trend in commodity prices remains down. We expect a fall to $US0.70 by year end, and a probable overshoot into the $US0.60s in the years ahead.

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What's happening at the Fed?

Monday, May 18, 2015

By Shane Oliver

What to watch over the next week?

In the US, the minutes from the Fed’s last meeting are likely to confirm that while it’s not in a hurry to raise interest rates the decision will nevertheless be dependent on the flow of data regarding the state of the US economy.

Meanwhile, on the data front, expect to see modest improvements in the NAHB home builders’ index (Monday), housing starts and permits (Tuesday), existing home sales (Thursday) and the Markit manufacturing conditions PMI (Friday). CPI inflation (Friday) is expected to remain low.

Eurozone business conditions PMIs (Thursday) are likely to show a modest rise after a slight pullback in April and progress on Greece will be watched for around the European leaders’ summit (Thursday).

Japanese March quarter GDP growth (Wednesday) is expected to be around 0.4% quarter on quarter, unchanged from the December quarter and the manufacturing PMI (Thursday) will hopefully show an improvement after a soft April reading. The Bank of Japan meets Friday but is unlikely to make any changes to monetary policy.

In China, the HSBC flash manufacturing conditions PMI (Thursday) is expected to show a modest improvement after weakness seen in April.

In Australia, the minutes from the RBA’s last meeting (Tuesday) will be watched for signs as to how strongly the Bank retains an easing bias. Meanwhile, the Westpac consumer confidence survey (Wednesday) is likely to show a positive reaction to the Federal Government’s Budget.

Outlook for markets

Given the uncertainties around the bond sell off, the Fed’s eventual move to tightening and Greece, the next few months could remain volatile for shares. However, notwithstanding near term risks, the conditions for an end to the cyclical bull market in shares are still not in place: valuations against bonds remain good; economic growth is continuing at a not too cold but not too hot pace; and monetary conditions are set to remain easy. As such, share markets are likely to see another year of reasonable returns. My year-end target for Australian shares remains 6000. It’s just that the market got ahead of itself with the surge earlier this year.

Still low bond yields point to soft medium term returns from bonds, but it’s hard to get too bearish on bonds in a world of too much saving, spare capacity and deflation risk. Central banks won’t be ratifying a bond crash like in 1994.

Despite the risk of a further short term bounce in the $A – possibly up to the 200 day moving average around $US0.83-84 - the broad trend is likely to remain down as the Fed is still likely to raise rates later this year whereas the RBA retains a mild easing bias (which is likely to turn into an easing if the $A doesn’t soon head back down) and the long term trend in commodity prices remains down. We expect a fall to $US0.70 by year end, and a probable overshoot into the $US0.60s in the years ahead.

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The lessons of the last Budget

Monday, May 11, 2015

By Shane Oliver

What to watch over the next week?

In the US, expect a 0.3% gain in retail sales (Wednesday) as the winter freeze recedes, an improvement in the New York regional manufacturing conditions index and industrial production (Friday) and another low reading for PPI (Thursday).

Eurozone March quarter GDP data (Wednesday) is expected to confirm that growth has picked up, probably to around 0.4% quarter on quarter, the strongest in four years. Spain is likely to be a star performer with March quarter growth. While Greece seems to have enough funding to last through May, the Eurozone finance ministers’ meeting (Monday) will be watched for signs of progress in reaching a deal with Greece.

Chinese economic activity data for April (Wednesday) is expected to show a slight improvement in momentum, particularly for industrial production and retail sales. Money supply and credit growth will also be watched for an improvement following recent monetary easing.

In Australia, the main focus will be Tuesday’s Budget. After the political failure of last year’s tough Budget, this year’s Budget is likely to be “dull” and “boring.” The bad news will be that lower than expected commodity prices and wages growth will have delivered another blow to revenue and a blow out in the budget deficit of around $8-$10 billion per annum, compared to the projections in the December Mid-Year Economic and Fiscal Outlook, and a further delay in the return to surplus to around 2021. After a 2014-15 budget deficit of $45 billion (or 2.8% of GDP) the deficit for 2015-16 is likely to be around $41 billion (2.4% of GDP), which is $10 billion worse than projected in December.

We are now looking at a 13-year run of budget deficits, which swamps the seven years seen in the 1990s and the five years in the 1980s. What’s worse is that this time around we haven’t even had a recession. The continuing delay in returning to surplus from a projection of 2012-13 in the 2012-13 Budget, to 2016-17 in the 2013-14 Budget, to 2019-20 in the 2014-15 Budget and now to around 2021-22 is cause for concern and begs the question whether we will ever get there. There are real reasons for concern here because demographic pressures on the Budget will start to build from early next decade and we now don’t have a lot of flexibility to provide stimulus should our luck turn against us and the economy really turn down.

The good news is that this year is likely to see a more politically measured approach from the Government so there is unlikely to be the big negative for confidence that last year’s fairness debate and Senate debacle proved to be. The Government is unlikely to fight the hit to revenue, but rather fund any additional spending by middle ground political measures – such as lowering the assets test for the pension, measures to combat tax avoidance by multinational companies, extending the GST to low value online imports and a bank deposit tax. “Spending” measures are likely to include more generous, but more targeted, child care payments, a small business tax cut and increased infrastructure funding.

On the data front in Australia, the NAB business survey for April (Monday) will be watched for further signs of improvement, expect another modest rise in housing finance (Tuesday) and wages growth (Wednesday) is expected to remain soft at around 2.5% year on year.

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What to watch over the next week

Monday, May 04, 2015

By Shane Oliver

In the US, expect April payroll employment (Friday) to bounce back with a gain of 225,000 new jobs after the weather-depressed result for March. Unemployment is expected to fall slightly to 5.4% (from 5.5%) and hourly wages growth is expected to pick up a bit. Expect the non-manufacturing conditions ISM to remain solid and the trade balance to deteriorate a bit (both Tuesday).

The UK election on Thursday could see the Cameron led Government being replaced by a Labour led coalition. Amongst other things this should head off the referendum on the UK’s membership of the EU, which is probably a good thing for the UK but ultimately of little consequence for the Eurozone.

In China, expect April export growth (Friday) to bounce back after a 15% fall over the year to March that looks to have been related to the Chinese New Year holiday related distortion. Inflation data (Saturday) for April is expected to show CPI inflation remaining low and producer prices still deflating.

In Australia, we expect the RBA (Tuesday) to act on its easing bias and cut the cash rate to 2% (from 2.25%), but it’s another very close call. The case for another cut remains strong: the outlook for business investment remains weak, commodity prices are softer than expected, the $A remains too high and is at risk of rebounding further and inflation is benign.

However, the RBA may continue to fret about housing leverage and Sydney home price gains and the bounce in the iron ore price over the last few weeks has eased the pressure on the RBA a bit. So while our base case is for a cut, another month on hold would not be surprising. Meanwhile, the RBA’s Statement on Monetary Policy (Friday) is likely to contain further downgrades to the growth outlook, mainly in response to the soft outlook for business investment.

On the data front in Australia, expect to see a 1% gain in building approvals (Monday), a slight improvement in the trade deficit (both Tuesday), a modest gain in March retail sales but solid real retail sales growth for the March quarter (Wednesday) and flat employment for April (Thursday) after two very strong months which should see the unemployment rate rise to 6.2%.

Outlook for markets

As we come into May I get kind of nervous given the old saying “sell in May and go away, buy again on St Leger Day’. The seasonal pattern for shares points to a tougher patch in the May-October period and uncertainty around the Fed could well be a trigger to a correction.



Source: Bloomberg, AMP Capital

However, notwithstanding near term risks, the cyclical bull market in shares likely has to further to go as:  valuations, particularly against bonds, are good; economic growth is continuing; and monetary policy is set to remain easy with further easing in Europe, Japan, China and Australia and only a gradual tightening in the US. As such, share markets are likely to see another year of reasonable returns. My year-end target for Australian shares is 6000.

Low bond yields point to soft medium term returns from sovereign bonds, but it’s hard to get too bearish on bonds in a world of too much saving, spare capacity and deflation risk.

Despite the risk of a further short term bounce in the $A the broad trend is likely to remain down as the Fed is likely to raise rates later this year whereas the RBA remains on track to cut and the long term trend in commodity prices remains down.

We expect a fall to $US0.70 by year end, and a probable overshoot into the $US0.60s in the years ahead

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The Fed is the focus

Monday, April 27, 2015

By Shane Oliver

What to watch over the next week?

In the US, expect the Fed (Wednesday) to remain relatively dovish and in no hurry to raise interest rates. The Fed and Chair Yellen have already signalled that no hike is likely in April so the focus will be on any signals in the post meeting statement as to how close a rate hike is.

While some Fed officials still lean towards a June move, the majority are seeing September or later as the timeframe for a lift off. Sure recent inflation readings suggest it may be bottoming, but the mixed run of economic data combined with the dampening impact of the rise in the $US over the last year, indicate that there is no reason for the Fed to hurry. In fact, a move as early as June could be very damaging for US and hence global growth. My base case for Fed lift off is September but the risks are skewed later.

March quarter US GDP growth of around 1% annualised (Wednesday), albeit partly weather related, is likely to highlight why the Fed is in no hurry. In terms of other data, expect a further rise in home prices (Tuesday), a slight gain for consumer confidence, but a slight fall in pending home sales (both Wednesday), a benign reading for the core consumer price deflator inflation measure, a further increase in employment cost growth (both Thursday) and a slight improvement in the ISM manufacturing conditions index (Friday).

In Europe, the focus will be on progress towards an agreement regarding Greek funding with the risk of a "Graccident" (a payment default) rising as we go into May. Eurozone inflation (Thursday) is likely to rise, with energy prices confirming that deflation threats are receding, but remain well below target. Expect a slight fall in confidence indicators (Wednesday) consistent with the slight fall in April PMIs already released.

The Bank of Japan (Thursday) is expected to leave monetary policy unchanged but pressure for further easing remains. On the data front, expect to see a rebound in industrial production and okay labour market data, but mixed readings for household spending and inflation, excluding the impact of the sales tax hike running well below target (all Friday).

China's official manufacturing conditions PMI (Friday) may soften a bit just below the 50 level, consistent with the HSBC flash PMI already released.

In Australia, a speech by RBA Governor Glenn Steven's (Tuesday) will be watched for any clues regarding interest rates following the release of March quarter inflation data. On the data front, expect another moderate gain in March private credit data (Thursday), but the focus will be on whether housing investor credit continues to show signs of reduced momentum. Meanwhile, expect another mainly Sydney driven gain in RP Data home prices for March, continued weakness in the AIG's manufacturing conditions PMI and benign producer prices for the March quarter (all Friday).

Outlook for markets

We remain of the view that shares are likely to see a decent correction at some point this year. A Greek default is a potential near term driver and anticipation of the Fed’s first interest rate hike could be a potential trigger later in the year.

However, the trend in shares is likely to remain up as:  valuations, particularly against bonds, are good; economic growth is continuing; and monetary policy is set to remain easy with further easing in Europe, Japan, China and Australia and only a gradual tightening in the US. As such, share markets are likely to see another year of reasonable returns. Eurozone, Japanese and North Asian shares are likely to outperform US and Australian shares.

Low bond yields point to soft medium term returns from sovereign bonds, but it’s hard to get too bearish on bonds in a world of too much saving, spare capacity and deflation risk.

The trend in the $A is likely to remain down as the Fed is still likely to raise rates this year whereas the RBA remains on track to cut and the long term trend in commodity prices remains down. We expect a fall to $US0.70 this year, and a probable overshoot into the $US0.60s in the years ahead.

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A full week of US earnings results

Monday, April 13, 2015

By Shane Oliver

What to watch over the next week?

In the US, expect a solid rebound in retail sales (Tuesday) after a soft few months, a slight fall in industrial production (Wednesday), a rise in the NAHB home builder conditions survey (Wednesday), a 16% gain in housing starts (Thursday) and benign consumer price inflation (Friday) leaving plenty of flexibility for the Fed in terms of timing the first interest rate hike. The Fed’s Beige Book of anecdotal evidence, along with manufacturing conditions surveys for the New York and Philadelphia regions, will also be released.

US March quarter earnings results will start to flow in earnest and this could be a source of market volatility. Consensus expectations for a 5.8% fall in profits over the year to the March quarter may prove to be a bit too pessimistic but there is little doubt that the rise in the value of the $US will have hurt earnings, with around 25% of US earnings sourced in foreign currencies.

The ECB meets Wednesday but no change to monetary policy is expected. Based on recent economic indicators, ECB President Draghi is likely to express confidence that its expanded quantitative easing program is working.

In China, March quarter GDP data (Wednesday) is likely to confirm a further slowing in economic growth to around 7% year on year (from 7.3% in the December quarter). Meanwhile, expect March data to show a fall back in export growth after an unbelievable 48% surge over the year to February, but some improvement in momentum for imports, industrial production, retail sales and fixed asset investment (with the last three all due Wednesday).

In Australia, expect: business and consumer confidence to have remained subdued, according to the NAB business survey (Tuesday) and the Westpac/Melbourne Institute Consumer Sentiment survey (Wednesday); housing starts (Wednesday) to show a decent gain, confirming the strength in building approvals; and jobs data (Thursday) to show a 10000 gain in employment and unemployment remaining unchanged at 6.3%.

Outlook for markets

At some point this year shares are likely to see a decent correction with the anticipation of the Fed’s first interest rate hike a potential trigger. However, the trend in shares is likely to remain up as:  valuations, particularly against bonds, are good; economic growth is continuing; and monetary policy is set to remain easy with further easing in Europe, Japan, China and Australia and only a gradual tightening in the US. 

As such, share markets are likely to see another year of reasonable returns. Eurozone, Japanese and North Asian shares are likely to outperform US and Australian shares.

Low bond yields point to soft medium term returns from sovereign bonds, but it’s hard to get too bearish on bonds in a world of too much saving, spare capacity and deflation risk.

The trend in the $A is likely to remain down as the Fed is still likely to raise rates this year whereas the RBA remains on track to cut and the long term trend in commodity prices remains down. We expect a fall to $US0.70 this year, and a probable overshoot into the $US0.60s in the years ahead.

Eurozone shares gained 0.9% on Friday and the US S&P 500 rose 0.5%, helped by an 11% rise in GE as it announced a restructure. The positive global lead along with gains in most commodities saw ASX 200 futures rise 22 points or 0.4% pointing to a positive start to trade for the Australian share market on Monday.

 

 

 

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What to watch over the next week

Tuesday, April 07, 2015

By Shane Oliver

The week ahead

In the US, the focus will likely be on the start of the March quarter profit reporting season which is kicked off by Alcoa on Wednesday. Consensus expectations for a 5.8% fall in profits over the year to the March quarter may prove to be a bit too pessimistic but there is little doubt that the rise in the value of the $US will have hurt earnings, with around 25% of US earnings sourced in foreign currencies.

Meanwhile, expect the minutes from the last Fed meeting (Wednesday) to confirm that the Fed has become more dovish but is now dependent on the flow of economic data in terms of determining when the first rate hike will come.

In the Eurozone, the main focus will be on whether Greece gets new funding released in time to cover debt payments it needs to make.

In China, expect inflation (Friday) to have remained low in March with producer prices continuing to deflate.

In Australia, the RBA (Tuesday) is expected to cut the cash rate by 0.25% taking it to a record low of 2%. Once again it’s a close call as the RBA may decide to wait for March quarter inflation data due later this month and ongoing strength in the Sydney property market is clearly an argument against further rate cuts.

However, the additional 21% fall in the iron ore price since the RBA’s last meeting has added urgency to the case for the RBA to cut rates again at a time when the growth outlook remains subdued, the outlook for business investment is poor, inflation remains benign and the $A is still too high and could break higher as the Fed continues to delay its first interest rate hike.

What’s more, outside of Sydney property markets are losing momentum, and in some cases are quite weak, so isolated strength in the Sydney property market should really be dealt with by APRA and is not an argument to deny the overall economy lower interest rates. The RBA needs to set interest rates for the “average” of the economy, not just one city. And so on balance we expect the RBA to cut rates again on Tuesday.

On the data front expect to see a modest gain in retail sales (Tuesday) and a bounce back in housing finance (Friday) after softness in January. ANZ job ads data will also be released.

Outlook for markets

At some point this year shares are likely to see a decent correction with the anticipation of the Fed’s first interest rate hike likely to provide the trigger.

However, the trend in shares is likely to remain up as:  valuations, particularly against bonds, are good; economic growth is continuing; and monetary policy is set to remain easy with further easing in Europe, Japan, China and Australia and only a gradual tightening in the US. As such, share markets are likely to see another year of reasonable returns. Eurozone, Japanese and North Asian shares are likely to outperform.

Low bond yields point to soft medium term returns from sovereign bonds, but it’s hard to get too bearish on bonds in a world of too much saving, spare capacity and deflation risk.

The trend in the $A is likely to remain down as the Fed is still likely to raise rates this year whereas the RBA remains on track to cut and the long term trend in commodity prices remains down. We expect a fall to $US0.70 this year, and a probable overshoot into the $US0.60s in the years ahead.

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What to watch over the next week?

Monday, March 30, 2015

By Shane Oliver

In the US, the main focus is likely to be on the March manufacturing conditions ISM (Wednesday) which is likely to show a modest improvement after the weather affected February result and March employment data (Friday) which is likely to show a strong 250,000 gain in jobs and unemployment remaining unchanged at 5.5%. 

Meanwhile, the Fed's preferred inflation measure, ie the core private consumption deflator (Monday) will likely show that inflation remains benign and data for pending home sales (also Monday), home prices and consumer confidence (both Tuesday) and the trade balance (Thursday) will also be released. 

Eurozone inflation data for March (Tuesday) will likely show that deflationary pressures are bottoming with energy prices (at least for now) and that unemployment (also Tuesday) is continuing to trend down, albeit only gradually. Economic confidence measures (Monday) will also be watched to see if they confirm the gradual improvement evident in PMIs. The reaction of Eurozone finance ministers to Greek commitments will clearly be watched closely given Greece’s rapidly approaching need for new funding to be disbursed.

Japan's February industrial production data (Monday) and March quarter Tankan business survey (Wednesday) will be watched for continuing signs of recovery after last year’s sales tax hike inspired recession.

China's March official manufacturing conditions PMI (Wednesday) will likely drift a bit lower as foreshadowed by the HSBC flash PMI that has already been released, providing a further sign that more monetary easing is needed in China.

In Australia, expect continued investor housing driven growth in private credit data and solid HIA new home sales figures (both Tuesday), a 2% pullback in building approvals from the record high seen in January and further modest growth in March RP Data home prices (both Wednesday) driven mainly by Sydney and a further deterioration in the trade balance (Thursday) driven by lower commodity prices. The AIG's manufacturing conditions PMI and data on job vacancies will also be released.

On the political front, how the NSW Liberal Government faired in Saturday's election will no doubt attract significant attention. From an economic view point the main issue at stake relates to the Federal Government's infrastructure asset recycling program. NSW is now the only state really set to participate to any significant degree in this program but it is contingent on the current state Government getting a enough support for its "privatisation" plans in the upper house (which is a bit less clear).

Outlook for markets

At some point this year shares are likely to see a decent correction with the anticipation of the Fed’s first interest rate hike likely to provide the trigger. However, the trend in shares is likely to remain up as:  valuations, particularly against bonds, are good; economic growth is continuing; and monetary policy is set to remain easy with further easing in Europe, Japan, China and Australia and only a gradual tightening in the US. As such, share markets are likely to see another year of reasonable returns. Eurozone, Japanese and North Asian shares are likely to outperform.

The dovish message from the last Fed meeting has helped trigger a short covering rally in the Australian dollar (and in the Yen and Euro). However, so far it’s been fairly week. More broadly, the trend in the Aussie is likely to remain down as the Fed is still likely to raise rates this year, whereas the RBA remains on track to cut and the long term trend in commodity prices remains down. We expect a fall to $US0.70 this year, and a probable overshoot into the $US0.60s in the years ahead.

Eurozone shares gained 0.6% on Friday and the US S&P 500 rose 0.2% as tech shares recovered some of their losses for the week. Despite the positive global lead, ASX 200 futures fell 34 points or 0.6%, possibly reflecting falls in commodity prices including oil as fears of a flow on regarding the Yemen conflict faded. This is pointing to a soft start to trading for the Australian share market on Monday.

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The economic week ahead

Monday, March 23, 2015

Investment markets and key developments over the past week

Indications from the US Federal Reserve that it is not in a hurry to raise interest rates dominated financial markets over the past week with US shares (up 2.7%) receiving a strong boost and this flowing on to most major share markets (with Eurozone shares up 1.5% and Japanese shares up 1.6%), including Australian shares which rose 2.8% to their highest close since 2008.

Chinese shares also surged 7.2% to their highest since 2008 on indications that the Chinese Government will do more to support growth. Bond yields generally declined. The Fed’s dovish commentary also saw the $US fall back and this saw the $A rise and most commodity prices rise.

The Fed may have dropped “patient” in terms of when it will raise interest rates, but it’s a long way from being “impatient” with very dovish commentary. Lower rates for longer is the key message.

While a June rate hike is still a possibility, the downwards revision to the Fed’s growth and inflation forecasts, its reference to growth “moderating somewhat”, its requirement for further improvement in the labour market and reasonable confidence that inflation will move back to 2% and a cut in the median expectation (the so called “dot plot”) for the Fed Funds rate to 0.625% for year end from 1.125% all point to September as now being the new base case for the first Fed rate hike. It could be even later.

What’s clear is that the Fed is well aware of the dampening impact of the stronger $US and is not going to risk de-railing the US economic recovery with a premature rate hike. It has clearly learned well the lessons of 1937 when premature tightening tipped the US economy back into recession/depression.

This is all positive for growth assets and bonds and may see a pause in the $US rally. That said, it’s worth bearing in mind that the Fed is still likely to start raising interest rates at some point this year and speculation around when this will occur will continue to cause occasional bouts of volatility in investment markets.

However, regardless of when the Fed starts to hike, overall global monetary conditions will remain easy with Europe, Japan, China and Australia all set to ease further so shares are likely to remain in a rising trend.

Major global economic events and implications

US economic data was generally soft with weaker than expected industrial production, New York and Philadelphia regional manufacturing conditions, home building conditions and housing starts. This may partly reflect poor weather, with permits to build new homes actually up. It’s like déjà vu all over again though with the US economy going through a soft March quarter like it did early last year. While it’s likely to pass as it did a year ago, it does provide plenty of justification for the Fed to hold back from raising rates.

The Bank of Japan made no additional changes to its quantitative easing program. None was expected, but further easing is likely to be required at some point to help ensure that growth and inflation targets are met.

The threat from the Chinese property slump appears to be receding a bit. Chinese property prices are continuing to decline, but the monthly pace has slowed to around -0.4% from -1% around the middle of last year.

While it’s too early to see much impact from recent monetary easing its probable that last year’s easing up on home ownership and mortgage restrictions may be helping. More broadly, Premier Li’s comments to the effect that growth needs to be supported in a reasonable range highlights that recent soft data may be approaching the Government’s comfort zone and that as a consequence further policy easing is likely.

The prospect of more policy stimulus partly explains why the Chinese share market has taken off again, making new recovery highs.

Australian economic events and implications

The minutes from the last RBA Board meeting signalled a clear bias towards cutting rates again. However, while another easing was considered at the last meeting it was clear that the Reserve was in no rush deciding to allow more time for the economy to adjust to the last cut and to await more data on the economy. This could well carry over to the April meeting meaning that the next cut may not come until May.

A speech by Governor Stevens did nothing to alter the view that rates will fall further, but that the RBA is not in a hurry.

Meanwhile, the RBA can’t ignore the dovish commentary coming from the Fed. To the extent that a delay in commencing rate hikes by the Fed puts upwards pressure on the value of the $A, it will only increase the urgency for the RBA to cut rates again.

On the fiscal policy front, the Prime Minister’s foreshadowing of a “boring” May Budget suggests we may not see a re-run of last year’s confidence zapping battle over spending cuts. By the same token it begs the question of when the budget will be brought back under control and what will be done about the long-term pressure on spending from the aging population.

Australian petrol prices remain much higher than justified. While world oil prices have been falling again, petrol prices have been going back the other way (pushing around $1.37/litre in parts of Sydney). Based on the normal relationship between the level of the Asian Tapis oil price in Australian dollars and average Australian petrol prices, petrol prices should be running around $1.10/litre right now. See chart below.

Source: Bloomberg, AMP Capital

What to watch over the next week?

In the US, expect existing and new home sales (due Monday and Tuesday respectively) to remain on the soft side thanks to poor weather, house prices (Tuesday) to show continued gains, the manufacturing PMI (Tuesday) and services PMI (Thursday) to remain solid and durable goods orders to show further gains. CPI inflation (Tuesday) is likely to have remained benign.

Eurozone business conditions PMIs (Tuesday) will likely show a further slight improvement.

Japanese data for employment, household spending and inflation will all be released Friday.

The Chinese manufacturing conditions PMI (Tuesday) may fall slightly after a couple of months of gains.

In Australia, the RBA’s six-monthly Financial Stability Review (Wednesday) is expected to indicate that the Australian financial system remains in good shape, but highlight again the risks in the household sector associated with rapid house price gains.

The New South Wales state election (28 March) will also be watched closely – if the current Government is returned with an upper house majority it will become the only state to significantly implement the Federal Government’s infrastructure asset recycling program.

Outlook for markets

The dovish message from the Fed may mean that any serious setback in shares will be delayed into the second half of the year. More broadly, the trend in shares is likely to remain up as: valuations, particularly against bonds, are good; economic growth is continuing; and monetary policy is set to remain easy with further easing in Europe, Japan, China and Australia and only a gradual tightening in the US. As such, share markets are likely to see another year of reasonable returns.

Eurozone, Japanese and North Asian shares are likely to outperform.

Commodity prices could see a short covering rally helped by the Fed’s dovishness which has helped push down the $US. However, excess supply is expected to see them remain in a long-term downtrend.

Low bond yields point to soft medium term returns from sovereign bonds, but it’s hard to get too bearish on bonds in a world of too much saving, spare capacity and deflation risk.

The dovish message from the Fed may have triggered a short covering rally in the $A (and in the Yen and Euro). However, the broad trend in the $A is likely to remain down as the Fed is still likely to raise rates this year whereas the RBA remains on track to cut and the long term trend in commodity prices remains down. We expect a fall to $US0.70 this year, and a probable overshoot into the $US0.60s in the years ahead.

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All eyes on the Fed

Monday, March 16, 2015

By Shane Oliver

In the US, the focus will be on the Fed’s meeting (Wednesday) where there is a good chance that it will drop the reference to being “patient” in moving to raise interest rates, replacing it with comments to the effect that the commencement of the tightening cycle will be dependent on further economic improvement and more confidence that inflation will move back to its 2% target over the medium term. The Fed is getting closer to a rate hike but given the cross currents affecting the US economy, June or September remain the most likely timing, with a coin toss between them!

On the data front in the US, expect to see solid readings from the New York and Philadelphia Fed manufacturing conditions indices (Monday and Thursday respectively), a modest gain in industrial production (Monday), gains in the NAHB home builder survey (also Monday) and in housing permits, but a weather affected fall in housing starts (both due Tuesday).

The Bank of Japan meets Tuesday but is unlikely to announce further easing just yet.

In Australia, it will be a quiet week on the data front with focus likely returning to the RBA with the minutes from its last Board meeting (Tuesday) expected to confirm that the RBA retains an easing bias and still sees the Australian dollar as being too high. A speech by Governor Stevens on Friday will also be watched for any clues on the interest rate outlook. We continue to expect another rate cut in the next month or so, with a high chance rates could fall below 2% thereafter.

Outlook for markets

Shares are at risk of a further correction with Fed progress towards a rate hike being the main potential trigger. However, the broad trend in shares is likely to remain up as: valuations, particularly against bonds, are good; economic growth is continuing; and monetary policy is set to remain easy with further easing in Europe, Japan, China and Australia and only a gradual tightening in the US. As such, share markets are likely to see another year of reasonable returns. Eurozone, Japanese and North Asian shares are likely to outperform.

Commodity prices have been seeing a consolidation after becoming very oversold, with oil looking like it may have built a short term base around $US45/barrel. However, excess supply is expected to see them remain in a long-term downtrend.

While Eurozone shares gained 0.4% on Friday, the US S&P 500 fell 0.6% weighed down by a further gain in the $US and falling oil prices. The weak US lead points to a soft start to trading for the Australian share market on Monday with ASX 200 futures down 11 points or 0.2%.

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