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

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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Shares at risk of a correction

Monday, March 09, 2015

By Shane Oliver

What to watch over the next week?

In the US, expect a 0.6% gain in February retail sales (Wednesday) and a modest bounce in producer price inflation (Friday) on the back of a bounce in gasoline prices. Data for small business optimism and consumer confidence will also be released.

While the US Government will hit its debt ceiling again on March 15, the Federal Government looks to have sufficient resources to operate out to October/November and Congress is likely to increase the ceiling as Republicans are unlikely to want a re-run of the 2013 debt ceiling episode where they got the blame given 2016 is a presidential election year.

In China, expect February data to show that inflation (Tuesday) remains low and that growth in retail sales, industrial production and fixed asset investment (all Wednesday) have slowed slightly. Credit and money supply growth will also be released. The net outcome will likely be ongoing pressure for further monetary easing.

In Australia, expect business conditions and confidence in the February NAB survey (Tuesday) and consumer confidence (Wednesday) to have remained subdued, housing finance (Wednesday) to fall 1% after a solid gain in December and a modest 5000 gain in jobs (Thursday) to see unemployment unchanged at 6.4%. The ANZ job ads survey will also be released Monday.

Outlook for markets

After recent strong gains shares are at risk of a 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.

Having been rejected by the 6000 level (at 5996.9 to be precise for the S&P/ASX 200), Australian shares are also vulnerable to a short-term correction particularly with the forward PE around 16 times, which is above its long term average of 14 times, leaving it vulnerable to any bad news. Iron ore below $US60/tonne certainly won’t help. A correction would likely then set the market up for a sustainable re-test of the 6000 level a few months down the track.

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.

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.

Short term gyrations aside, the downtrend in the Australian dollar is likely to continue as the US dollar trends up, the RBA continues to cut rates and reflecting the long term downtrend in commodity prices and Australia’s high cost base. We expect a fall to $US0.70 this year, with the risk of an overshoot. However, the Aussie is likely to be little changed against the Yen and Euro.

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What to watch over the next week

Monday, March 02, 2015

By Shane Oliver

In the US, expect the February ISM manufacturing conditions index (Monday) and non-manufacturing conditions index (Wednesday) to hold around reasonably solid levels and payroll employment (Friday) to show continued strength, with 250,000 new jobs helping to push the unemployment rate down to 5.6%.

The ECB (Thursday) is unlikely to make any further changes to monetary policy, having just announced a significant quantitative easing program in January. ECB February inflation data (Monday) will likely show continued deflation driven by the fall in fuel prices.

Chinese trade data (March 8) is likely to show a bit of an improvement after Lunar New Year holiday distortions contributed to weakness in both exports and imports in January.

In Australia, the RBA should, and most likely will, cut interest rates again by another 0.25% on Tuesday to ensure maximum impact from its February cut in boosting confidence and spending growth and in maintaining downwards pressure on the $A. The weakness in the business investment outlook has only added to the urgency to cut interest rates again. While surging Sydney property prices are a concern this should really be dealt with by macro prudential means, particularly with property price growth only modest in other cities. While it’s another close call, on balance the RBA will cut again on Tuesday.

On the data front, December quarter GDP growth (Wednesday) is expected to show the economy continuing to expand at a sub trend pace with weak investment, but strength in consumer spending, dwelling construction and net exports. GDP growth is expected to be around 0.6% quarter on quarter or 2.5% year on year. Meanwhile, expect to see further gains in February home prices (Monday) helped by the latest rate cut, a modest rise in building approvals (Tuesday) and a 0.4% gain in January retail sales. Data for new home sales, trade and the business conditions PMIs will also be released.

Outlook for markets


Notwithstanding the risk of a correction after recent strong gains, 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.

Thanks to investor demand for yield, a stabilisation in commodity prices helping resources stocks and some reasonable profit results the Australian share market is looking like it will soon breach the 6000 level on the ASX 200.

Commodity prices have been seeing a bounce from very oversold conditions, 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.

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.

Short term gyrations aside, the downtrend in the $A is likely to continue as the $US trends up, the RBA continues to cut rates and reflecting the long term downtrend in commodity prices and Australia’s high cost base. We expect a fall to $US0.70 this year, with the risk of an overshoot. However, the $A is likely to be little changed against the Yen and Euro.

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What to watch over the next week?

Monday, February 23, 2015

By Shane Oliver

In the US, the main focus is likely to be on Fed Chair Janet Yellen’s Congressional testimony (Tuesday and Wednesday), which is expected to confirm that the Fed remains on track to raise interest rates this year, but can be patient in doing so.

Meanwhile, data for new and existing home sales (Monday and Wednesday) are likely to show slight falls after strong December gains but with pending home sales (Friday) likely to be up, home prices (Tuesday) are expected to have risen further in December and durable goods orders (Thursday) are likely to show a decent rise after a few soft months.

Of particular significance, December quarter GDP growth (Friday) is likely to have been revised down further to a 2% pace and inflation is expected to fall to -0.1% year on year at a headline level with core inflation falling to just 1.5% year on year. Both of which are expected to add to the case for the first Fed rate hike to come later in the year rather than in June.

In the Eurozone, the focus will be on whether the interim loan deal with Greece is finalised.

In Japan, January data for household spending, industrial production and the labour market will be watched on Friday for signs that the recovery that commenced last quarter is continuing. January inflation data will also be released.

The flash HSBC China manufacturing PMI (Wednesday) will likely remain softish.

In Australia, December quarter data is expected to show that wages growth (Wednesday) remains at record lows with annual growth of just 2.5%, December quarter construction data (also Wednesday) is forecast to be weak with strength in housing offset by weakness in mining related engineering construction.

Business investment data (Thursday) will be watched for signs of improvement in non-mining investment plans. Private credit data will be released Friday with the main interest being whether housing investor credit is breaching APRA's 10% growth limit.

The Australian December half profit reporting season will wrap up with over 80 major companies reporting including BHP, QBE, Worley Parsons, Qantas and Woolworths.

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Earnings numbers and the week ahead

Monday, February 16, 2015

By Shane Oliver 

Earning results 

Its early days in the Australian December half profit reporting season with just less than 20% of companies reporting to date and there is also a tendency for the good results to come out early, but so far so good. Sixty percent of results to date have beaten expectations, against a norm of 45%, while 76% have seen profits rise from a year ago, 54% have seen their share price outperform the day results were released and 73% have increased their dividends.

Key themes have been weakness amongst resources shares (on falling commodity prices) and mining services companies (on falling mining investment), continued strength for the banks, ongoing cost control and solid growth in dividends. 

 

Source: AMP Capital Investors

What to watch over the next week?

Overseas

The week ahead is PMI (Purchasing Managers Index) week with preliminary business conditions indexes or PMIs released for the US, Europe and Japan on Friday. The US PMI is likely to remain solid around 53.9 and a further improvement is expected in Europe and Japan. 

In the US, the minutes from the last Fed meeting (Wednesday) are likely to confirm that it remains comfortable in the way the economy is progressing but for now it can be patient in moving to raise interest rates. Meanwhile, the home builders conditions index (Tuesday) is likely to show a small gain, permits to build to new homes (Wednesday) are likely to rise but housing starts (also Wednesday) are likely to have fallen slightly after a very strong gain in December. Expect the New York and Philadelphia regional manufacturing conditions indices (Tuesday and Thursday respectively) and industrial production (Wednesday) to remain solid and January producer prices (Wednesday) to show a further fall. The December quarter earnings reporting season will start to wrap up.

Eurozone finance ministers will meet Monday to continue discussions regarding Greece.

Japanese December quarter GDP data (Monday) is likely to show a return to modest growth after two quarters of recession inspired by the April sales tax hike. 

Australia

In Australia, the Minutes from the last RBA Board meeting (Tuesday) are likely to confirm that the door is open to another interest rate cut, but are unlikely to say anything new given the Statement on Monetary Policy and Governor Steven’s Parliamentary testimony that post-date the last meeting. 

The December half profit reporting season will really ramp up with 80 major companies reporting including Amcor, Fortescue, IAG and AMP. Consensus earnings growth expectations for this financial year are near zero, driven by an expected 25% drop in resource profits on the slump in commodity prices. However, the rest of the market is stronger with industrials expected to see growth around 10% and banks to see about 8% growth. Expect ongoing cost cutting, help from the lower $A and strong dividend growth to be key themes.

Outlook for markets

Notwithstanding the risk of a correction – potentially as the Fed eventually moves to raise interest rates - 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.

Commodity prices have been seeing a bounce from very oversold conditions, with oil in particular looking like it may have built a short term base around $US45/barrel. However, excess supply for many commodities 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 in a world of too much saving, spare capacity and deflation risk.

Short term gyrations aside, the downtrend in the Australian dollar is likely to continue as the US dollar trends up and reflecting the long term downtrend in commodity prices and Australia’s relatively high cost base. We now expect a fall to around $US0.70, with the risk of an overshoot. However, the Australian dollar is likely to be little changed against the Yen and Euro.

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What to watch over the next week?

Monday, February 09, 2015

By Shane Oliver

Australian shares

Australian shares have been a star performer, having surpassed my (too optimistic) target for last year and my target for this year to now be up 7.6% year to date, which is up there with European shares.

Clearly the combination of lower interest rates boosting yield plays, the lower Australian dollar boosting earnings and a stabilisation in oil and commodity prices helping resources stocks are having a big impact.

While Australian shares are now looking a bit overbought in the short term (with the forward PE pushing above 15 times compared to a long term average around 14 times) and could see a correction or consolidation, the broad trend is likely to remain up.

 

What to watch over the next week

In the US, January retail sales (Thursday) ex fuel should bounce back after softness in December helped by low gasoline prices and consumer sentiment (Friday) should hold around an 11-year high. Data on small business confidence will also be released. US December quarter earnings results will continue to flow as the reporting season starts to wrap up.

Eurozone GDP data for the December (Friday) is expected to show growth of 0.3% quarter on quarter representing a slight improvement from the prior two quarters.

China’s January inflation rate (Tuesday) is expected to slow to just 1% year on year reflecting weaker food prices and the flow through of soft commodity prices to non-food inflation. This, combined with a steepening rate of decline in producer prices, is likely to add to pressure for further monetary easing. Money supply and credit data will also be released.

In Australia, a speech by RBA Governor Stevens (Monday) and his Parliamentary testimony (Friday) may add a little colour around the RBA’s latest interest rate cut, but is unlikely to change our view of another rate cut to come. ANZ job ads data (Monday) will likely continue to show modest growth, January NAB survey business confidence (Tuesday) will likely remain subdued, December quarter house prices are likely to show growth of around 2% quarter on quarter, consumer confidence (Wednesday) may get a boost from the latest rate cut and fall in petrol prices, housing finance (Wednesday) should show a bounce but employment (Friday) will likely have fallen by 10,000 after several unbelievably strong months resulting in a back-up in unemployment to 6.2%.

The December half profit reporting season will also start to get underway in earnest with 30 major companies due to report including Cochlear, Stockland, Telstra and Rio. Consensus earnings growth expectations for this financial year have already been wound back to near zero, driven by an expected 28% drop in resource profits on the back of the slump in commodity prices. However, the rest of the market is a bit stronger with industrials expected to see growth (for the fourth year on a row) of around 10% and banks to see about 8% growth. Given the difficult economic conditions the risks are to the downside, but ongoing cost cutting and help from the lower $A should be two key positive themes.

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What to watch over the next week

Monday, February 02, 2015

By Shane Oliver

In the US, expect to see a slight fall in the ISM manufacturing conditions index (Monday) but leaving it at a still strong reading of 55, continued strength in the non-manufacturing ISM (Wednesday) and another strong jobs report (Friday). January payrolls are expected to rise by a strong 235,000 with unemployment remaining at 5.6%. However, the focus in the jobs report is likely to be on wage earnings, which were surprisingly weak in December but are likely to have bounced back in January. The annual growth rate in wage earnings is still likely to be just below 2% though. Productivity and trade data will also be released. US December quarter earnings results will continue to flow.

In the Eurozone, final January business conditions PMIs (Monday and Wednesday are likely to confirm the slight improvements already reported in preliminary estimates.

In Australia, the RBA should cut interest rates by 0.25% on Tuesday.  Growth is too low, confidence is subdued, prices for key commodities like iron ore and energy have collapsed resulting in a much bigger hit to national income than expected a year ago, the Aussie dollar remains too high on a trade weighted basis and is set to bounce if the RBA fails to cut soon and benign inflation provides plenty of flexibility for the RBA to move. It’s not that I am bearish on the Australian economy. But rather it makes sense for the RBA to take out some insurance to make sure growth improves.

However, it’s a close call as to whether the Reserve will actually cut on Tuesday or wait till March as it may prefer to prepare the way for a cut by dropping the reference in its post meeting Statement to a “period of stability in interest rates” and by lowering its inflation forecasts in its Statement of Monetary Policy to be released Friday.

Ultimately it doesn’t matter a lot whether it’s in February or March, but the key is that interest rates need to come down and I expect they will either on Tuesday or if not then in March. But it would be easier to get the first cut out of the way now and hence avoid a short term bounce back up in the $A. Beyond the first cut there is a 50/50 chance of another cut taking the cash rate to 2% around May

Meanwhile, expect the TD Securities/MI Inflation Gauge (Monday) to show a further fall in inflation in January on further fuel price declines, a 3% pull back in building approvals (Tuesday) after November’s surge and a modest rise in December retail sales (Thursday) but good quarterly growth in real terms. Data for home prices (Monday), business conditions PMIs and the trade balance (Tuesday) will also be released. 

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What to watch over the next week?

Tuesday, January 27, 2015

By Shane Oliver

In the US, the Fed (Wednesday) is expected to reaffirm that it will remain patient in terms of when it will first start to raise interest rates and that it will be data dependent. While recent US economic and labour market data has been favourable it will be interesting to see how the Fed interprets the recent fall in core inflation. Our base case remains that the first hike will be in June, but with the risk of a delay. 

Meanwhile, on the data front in the US, expect gains in December durable goods orders, new home sales, house prices and consumer confidence (all due Tuesday) and pending home sales (Thursday). December quarter GDP (Friday) is expected to rise at a solid 3% annualised pace and the December quarter Employment Cost Index (also Friday) will likely also show continued modest growth. 

In Europe, the main focus will be on the outcome of the Greek election. It will be weeks or months before the outcome in terms of a Grexit from the Euro will be known. Syriza is no longer seeking to leave the Euro as it knows 70% of Greeks want to stay. But to stay it will have to reach agreement with the Trioka of the IMF, EU and ECB on its budget and reform program and to do this it will have to compromise. The pressure to do this will be immense because to not compromise will see Trioka funding withdrawn resulting in even worse austerity and ECB support for Greek banks removed. So I expect a deal to be struck. And finally, if there is no agreement and Greece does leave the Euro, the threat of contagion to peripheral countries is far less than it was in 2012 as Portugal, Ireland and Spain are now in much better shape and the defence mechanisms in Europe are far stronger with a strong bailout fund, a banking union and an aggressive ECB. 

Meanwhile, in Europe economic confidence indicators will be watched for further signs of stabilisation (Thursday) and the January CPI (Friday) is likely to show further modest deflation. 

Japanese economic activity data is expected to show further signs of improvement but inflation is likely to have slowed reflecting lower fuel prices (all due Friday). 

In Australia, expect the December quarter inflation rate (Wednesday) to have fallen below target leaving plenty of scope for another RBA rate cut. A 7% slump in petrol prices is likely to have resulted in inflation of just 0.1% quarter on quarter or 1.6% year on year. Underlying inflation is also expected to be relatively weak at just 0.5% quarter on quarter or 2.1% year on year. Both headline and underlying inflation are expected to come in below RBA expectations. 

Meanwhile the NAB business survey (Tuesday), trade prices (Thursday), producer prices and credit (Friday) will be released. 

Outlook for markets 

Uncertainties associated with the plunge in oil prices and the impact on energy producers, the Greek election and the Fed’s move towards a rate hike could result in a volatile first half in share markets with the risk of a 10-15% correction at some point along the way. 

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

The Australian share market is likely to do better than in 2014 as growth continues to rebalance away from resources helped by low interest rates and the fall in the $A. However, it will probably continue to lag global shares as commodity prices remain in a long-term downtrend. Expect the ASX 200 to rise to around 5700 by end 2015. 

Commodity prices may see a bounce from very oversold conditions, but excess supply for many commodities 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 in a world of too much saving, spare capacity and low inflation. 

The downtrend in the $A is likely to continue as the $US trends up and reflecting the long-term downtrend in commodity prices and Australia’s relatively high cost base. Expect a fall to around $US0.75. However, the $A is likely to be little changed against the yen and euro. 

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What to watch

Monday, January 19, 2015

By Shane Oliver

The main focus in the week ahead will be the ECB meeting (Thursday), which is expected to announce an expansion in its quantitative easing asset purchase program to include corporate and sovereign bonds. This should help the ECB reach its target of expanding its balance sheet by around €1trillion.

While the initial QE program may be for a fixed amount, President Draghi is likely to indicate that this will be extended if needed. Meanwhile, Eurozone PMIs for January (Friday) will be watched for a further improvement after the slight gain seen in December. And on 25 January the focus will shift back to Greece with its election, albeit it may take a while to determine the new government.

In the US, expect to see gains in the NAHB home builders’ conditions index (Tuesday), housing starts (Wednesday), house prices (Thursday) and existing home sales (Friday) and the Markit manufacturing conditions PMI (Friday) to remain reasonably solid.

The flow of US December quarter earnings reports will pick up. Market expectations remain for profits to be up 2% year on year but this still looks too cautious.

The Bank of Japan meets Wednesday but no change in monetary policy is likely given the huge further easing announced several months ago. Japan’s manufacturing PMI will be released Friday.

Chinese December quarter GDP (Tuesday) is likely to show a further moderation in growth to 7.2%, resulting in 7.3% GDP growth for 2014 as a whole which is in line with the official target for growth of “about 7.5%”. Meanwhile, December data is expected to show growth slightly weaker for investment, flat for retail sales and up slightly for industrial production. The flash HSBC manufacturing conditions PMI for January will be released Friday.

In Australia, expect to see a bounce in consumer confidence (Wednesday) on the back of lower petrol prices and the reported fall in unemployment. Data for car sales and new home sales will also be released.

Outlook for markets

Uncertainties associated with the plunge in oil prices and the impact on energy producers, the 25 January Greek election and Europe and the Fed’s move towards a rate hike could result in a volatile first half in share markets with the risk of a 10-15% correction at some point along the way. This may already be getting underway.

However, the broad trend in shares is likely to remain up as:  valuations, particularly against the reality of low bond yields, are good; economic growth is continuing; and monetary policy is set to remain easy with further easing likely in Europe, Japan, China and Australia and only a gradual tightening cycle in the US. As a result share markets are likely to see another year of reasonable returns.

The Australian share market is likely to do better than in 2014 as growth continues to rebalance away from resources, helped by low interest rates and the fall in the Aussie dollar. However, it will probably continue to lag global shares as commodity prices remain in a long-term downtrend. Expect the ASX 200 to rise to around 5700 by the end of 2015.

Commodity prices may see a bounce from very oversold conditions, but excess supply for many commodities is expected to see them remain in a long-term downtrend.

Very low bond yields point to a soft medium-term return potential from sovereign bonds, but it’s hard to get too bearish on bonds in a world of too much saving, spare capacity and low inflation.

The downtrend in the Aussie dollar is likely to continue as the US dollar trends up and reflecting the long-term downtrend in commodity prices and Australia’s relatively high cost base. Expect a fall to around $US0.75. However, the Aussie dollar is likely to be little changed against the yen and euro.

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