US labour market data remains strong with ultra-low jobless claims and ongoing very high readings for job openings, hiring and workers quitting for new jobs. Producer price inflation came in slightly weaker than expected in July but with core producer prices up 2.7% year on year it’s consistent with gradually rising inflation pressure and continued gradual Fed rate hikes. Meanwhile, the June quarter profit reporting season is wrapping up on a strong note with earnings up around 27% on a year ago. With 90% of S&P 500 companies having reported, 83% have beaten on earnings by an average beat of 5.4% and 71% have beaten on sales.

 

Despite the trade war threat Chinese exports and imports came in stronger than expected in July. However, imports may have been boosted by a cut to Chinese tariffs. Meanwhile inflation readings were benign in July, indicating that inflation provides no constraint to further policy stimulus in China.

 

In Australia, the RBA provided no surprises in leaving rates on hold for a record two years and given the cross currents in the economy there is a good chance they could be on hold for another two years. The RBA’s largely unchanged forecasts in their Statement on Monetary Policy portraying a “favourable outlook” (in the words of Governor Lowe) of growth around 3.25% and a gradual rise in inflation along with strong infrastructure investment, rising business investment and strong export volumes are consistent with the next move in rates being a hike. But the peak in the housing construction cycle, uncertainty about the outlook for consumer spending, the weakening Sydney and Melbourne property markets, the worsening drought, the risks that low inflation and wages growth will continue for longer and tight bank lending standards all indicate that the next move in rates could well be a cut.  The stand-off continues and the RBA will remain on hold for a while to come. On balance, we agree with the RBA that the next move in rates will probably be a hike, but we are a bit less upbeat on growth, wages and inflation than the RBA, so any rate hike is unlikely to come until 2020 at the earliest and there is a rising risk that the next move will actually be down. Maybe the Reserve Bank of NZ is showing the way in noting that “The direction of our next [interest rate] move could be up or down”!

 

Meanwhile, housing finance commitments continued to soften in June mainly driven by a decline in finance going to investors which looks to reflect both supply as banks continue to tighten lending standards and demand as investor expectations for capital growth slide in response to falling prices, suggesting that a negative feedback loop between falling prices and falling investor demand may be developing.

 

The Australian June half earnings reports will start to ramp up with 43 major companies reporting including BlueScope, Bendigo Bank and JB HiFi (Monday), Challenger (Tuesday), CSL, Fairfax, Woodside, IAG and Wesfarmers (Wednesday), ASX, Telstra and Origin (Thursday) and Cochlear (Friday). We are expecting 2017-18 earnings growth to come in around 9%, with resources earnings up 25% (albeit down from 130% in 2016-17) thanks to solid commodity prices and rising volumes and the rest of the market seeing profit growth of around 5%. Dividend growth is likely to remain solid.

 

While we see share markets being higher by year end as global growth remains solid helping drive good earnings growth and monetary policy remains easy, we are likely to see ongoing bouts of volatility and weakness as the US driven trade skirmish with China could get worse before it gets better and as worries remain around the Fed, President Trump in the run up to the US mid-term elections, China, emerging markets and property prices in Australia.

 

National capital city residential property prices are expected to slow further as Sydney and Melbourne property prices continue to fall, but Perth and Darwin bottom out, and Adelaide, Canberra and Brisbane see moderate gains.

 

Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.2%.

 

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