Global share markets mostly rose over the last week. US shares rose 0.9% on the back of solid economic data and a mixed but okay start to earnings reporting season. Eurozone shares rose 0.2% with the ECB cutting rates again. Japanese shares fell 1.6%, but Chinese shares rose 1% helped by better than feared economic data despite a lack of detail about fiscal stimulus plans Shane Oliver’s weekly update.
Australian shares have benefitted from the solid US lead and made it to record highs, rising 0.8% for the week. Gains on the Australian share market were led by financial, industrial and health care shares offsetting weakness in energy and IT shares. Oil prices fell 8.4% and metal and iron ore prices also fell, but gold prices rose to a record high. The $A fell as the $US rose.
Shares continue to face the risk of another correction, but the broad trend is likely to remain up. The key risks are that valuations are stretched particularly for US tech stocks, the risk of recession remains high in the US and Australia, the expansion of the war in the Middle East threatens to impact oil supplies and a Trump victory in the US election (with polling moving his way) could spark fears around another trade war. On a 6-12 month view though shares are likely to head higher on the back of the success in getting global inflation down, central bank rate cuts (with the RBA getting closer to joining in) and China ramping up policy stimulus. October can often see high levels of share market volatility, but beyond that we are coming into a positive time of the year for shares from a seasonal perspective.
Middle East uncertainty remains high – but at least Israel appears to have indicated to the US that when retaliating against the Iranian missile attacks it will strike Iranian military rather than oil or nuclear facilities, which should avoid a disruption to oil supplies and further escalation. At least for now! Uncertainty still remains as the retaliation is yet to occur, but oil prices are now only just 1.5% above their pre-Iran attack levels posing no upwards pressure on Australian petrol prices.
Global disinflation and rate cuts continued over the last week
September inflation data in Canada and the UK saw inflation fall below 2% and September quarter data saw New Zealand’s inflation rate fall to 2.2%yoy, which is back within the target range for the first time since March quarter 2021. This leaves the Bank of Canada on track to cut rates again in the week ahead, possibly by 0.5%, the Bank of England on track for another rate cut in November probably of 0.25% and the RBNZ also on track to cut in November by 0.5% but possibly by 0.75% as it doesn’t meet again until Feburary.
Source: Bloomberg, AMP
The ECB cut its key policy rates by another 0.25% taking its deposit rate to 3.25% and its main refinancing rate to 3.4% noting that “the disinflationary process is well on track”. While President Lagarde provided no forward guidance and noted that the ECB will remain data dependent the overall tone of the ECB’s communications was dovish with Lagarde seeing the risks to inflation as being on the downside. The ECB is likely to cut again at its next meeting in December. Central banks in the Philippines and Thailand both cut their key policy rates by another 0.25%.
Source: Bloomberg, AMP
The past few weeks have provided mixed messages as to the outlook for Australian interest rates. On the one hand falling global inflation is a good sign that Australian inflation will continue to fall. This is backed up by falls in forward looking output price indicators – in the NAB and PMI surveys – and the Melbourne Institute’s Inflation Gauge which are pointing to more good news on underlying inflation. And the RBA appears to be getting a bit less hawkish – with no consideration of another hike at its September meeting, the RBA dropping the “no rate cut expected in the near term” line from its formal communication and RBA Chief Economist Hunter noting that its less concerned about a rise in inflation expectations.
Against this though, the September jobs data came in on the strong side with unemployment falling back to 4.1% reducing the pressure to ease to help the economy and likely reinforcing RBA concerns that the jobs market is still too tight risking wages growth greater than is consistent with the 2-3% inflation target. That UK and US unemployment is also around 4% and yet they are seeing slowing wages growth and slowing inflation may provide the RBA with a bit of confidence not to be too concerned. But the September jobs data on its own reduces the possibility of a cut by year end (the money market now puts the probability at 26%) and puts greater importance on upcoming inflation releases. We think a December cut is still possible if underlying inflation comes in much weaker than expected, but our base case remains for the first cut to come in February.
Major global economic events and implications
US economic data releases over the last week were mostly solid. Industrial production fell in September with strikes and hurricanes impacting, housing starts and permits also fell and the October New York regional manufacturing index also fell but the Philadelphia regional manufacturing index rose, home builder’s conditions improved, jobless claims remained low & retail sales rose more than expected with real consumer spending on track for a rise of around 3.5% annualised in the September quarter. Partly reflecting this the Atlanta Fed’s GDP Now puts September quarter GDP growth at 3.4% annualised. At the same time price components of the regional manufacturing indices remained benign. So, Goldilocks continues!
Chinese September quarter data showed a further slowing in growth, but stimulus should help a bit over the year ahead. GDP growth slowed to 4.6%yoy, but September monthly growth for industrial production picked up to 5.4%yoy and that for retail sales improved but to a still weak 3.2%yoy. Monthly investment growth remained weak though at 3.4%yoy, annual credit growth slowed to a record low and exports and imports came in even weaker than expected. And property sales, investment and prices keep falling with the property sector remaining a key drag on growth. Growth this year may come in a bit below the 5% level, with policy stimulus providing some help but it’s getting a bit late to impact this year.
Source: Bloomberg, AMP
Reflecting the weakness in demand inflation fell further in September with core CPI inflation of just 0.1%yoy and producer price deflation accelerating to -2.8%yoy.
Source: Bloomberg, AMP
Still waiting for Chinese stimulus details. A press conference by the Ministry of Finance ticked many of the right boxes with more bond issuance to resolve local government debt, allow local governments to buy unsold property and help banks boost capital. But a Housing Ministry press conference provided only incremental moves. We are left waiting for the National People’s Conference Standing Committee meeting expected later this month to confirm the size of the fiscal stimulus package. And so far, there is not much on help for consumers. Our view remains that policy stimulus will provide a short term cyclical boost to maybe 5.5% growth next year, but won’t really address China’s longer term structural problems.
Published with permission from AMP Capital Blog
