Dr. Shane Oliver, Chief Investment Strategist and Chief Economist at AMP, discusses developments in investment markets over the past week, the trajectory of economic activity, major economic developments, and Australian economic developments.
Investment markets and key developments during the week
Stock markets have generally risen over the past week, with U. S. stocks buoyed by growing confidence in the Federal Reserve’s rate cuts this year and strength in tech stocks, with eurozone stocks buoyed by declines. of fears over the final results of the French elections and Japanese stocks rebounding. to a new high after consolidation since March. However, Chinese stocks fell. Reflecting positive global leadership, Australian shares rose around 0. 6%, led by resources and real estate stocks, although other sectors fell. Bond yields were mixed, falling in the US and much of Europe, but rising in Germany, Japan and Australia. Prices Exports of oil, metals and iron ore rose, as did the Australian dollar, while the US dollar fell.
A more difficult and limited movement in inventories is expected, although with a still upward trend over the next 12 months. The bad news is that stocks offer a low risk premium over bonds, investor sentiment is high (though at least not euphoric), US stocks are increasingly reliant on a similar stock select organization to artificial intelligence and technology, as the key US economy appears to be slowing. temporarily (the Atlanta Fed’s GDPNow estimate for June quarter expansion has fallen from 4. 2% annualized to just 1. 5% since mid-May) the threat of a recession that would be destructive to expectations of profits and geopolitical uncertainty is increasing again with the French elections. , the American elections and the existing problems in the Middle East and Ukraine. This will most likely lead to a deeper correction during the seasonally weak August/September era and higher volatility. The good news is that central banks are getting back on track for more rate cuts, which would be worth raising expansion expectations for 2025-2026 and lowering bond yields, which would ultimately help stock returns. .
Source: Bloomberg, AMP
With more and more talk, Biden will be replaced as the Democratic candidate’s leader and Trump continues to widen to around 3% in the general polls and on the PredictIt betting market, putting the Republican’s probability of victory at 59% compared to that of the Democrat (either Biden or his replacement) with 59%. For 45%, the focus will be on Trump’s policies. Tax cuts and deregulation will be cheered across stock markets; However, its policies of much higher price lists for imports, decreased immigration, and a less independent The Federal Reserve recommends increasing inflation with more tax cuts, likely to worsen America’s already gigantic budget deficit (which is around 7% of GDP), which is bad for bonds and may simply put pressure on stock market valuations. Of course, there is still a long way to go.
Source: Really Clear Policies, Bloomberg, AMP
Bond’s vigilantes and the French elections. The first circular of the French legislative elections, in which the far-right National Rally “won”, although with a percentage of votes slightly lower than that indicated by the polls (33% versus 36%) and with the withdrawal of the left-wing parties and center before the final circular. As a component of a “human cordon” aimed at reducing the elections to three that would split the vote and favor the NR, fears of a new eurozone crisis have diminished, especially in the difference between French and German bond yields. Heading into the second round of elections on Sunday, NR will most likely win more seats than any other alliance, but probably not enough to form a government. A hung parliament would not be smart in terms of deficit reduction and reform implementation; However, it could be considered a less bad final outcome for markets because it would reduce the threat of confrontations over fiscal policy and avoid extremist NR policies. . On the other hand, if NR were to manage to form a government, fears of a clash with the European Commission over budgetary policy would increase, which could, if NR succeeds, cause a new crisis. That said, it is worth keeping in mind that the NR is unlikely to embark on the path of abandoning the euro, as is popular in France. Second, just as emerging bond yields – the “bond vigilantes” – saved economically irresponsible fiscal policies in parts of Europe from the eurozone crisis last decade, especially in Greece (under far-left Syriza in 2015), and also in the United Kingdom (under the far-left Syriza government in 2015). the far-left Syriza regime in 2015). Truss) and in Italy in 2022 (under the leadership of Prime Minister Meloni and the Brothers of Italy), the same thing would probably happen if NR were able to form a government and try to do the same. Keep in mind that bond investors are not being mean or vindictive, but simply seeking to protect their investments; In other words, the message to errant governments is: “You can do whatever you want, but if it has to blow up the budget deficit in an unsustainable way, we won’t lend to you!” Finally, the ECB has tools that can be used to calm individual bond markets if necessary (provided the country meets certain criteria). That said, it may be a bit tricky for the markets in the meantime, if NR manages to form a government, all eyes will be on the outcome of Sunday’s elections.
As expected, Labor came back in force in the UK election with a giant primary, but this is a much more centrist iteration than the one introduced five years ago under Jeremy Corbyn, so big gains are unlikely. political adjustments with few primary implications for the market. Labor has promised an expansion-focused strategy, meaning measures and reforms to breathe life into expansion rather than an old left-wing tax-and-spend agenda. So far they have only committed to raising taxes very slightly and public spending is expected to increase only slightly. Therefore, there will most likely be no Truss-type fiscal surprises and there will be little to no impact on global markets.
Globally, progress toward lowering interest rates continued over the past week. Dovish economic knowledge from the United States, cautious but dovish minutes from the last Fed meeting, and Fed Chair Power’s comments that recent inflation knowledge “suggests we’re returning to a disinflationary path” have bolstered expectations that the Fed is expected to start tapering stimulus in September. ECB Christine Lagarde was cautious about the ECB’s convention in Sintra and inflation was combined in June with a drop in headline inflation, but core inflation remained unchanged at 2. 9%, but the ECB still looks on track to cut rates again at its September meeting. assembly.
Source: Bloomberg, AMP
At the moment, Australia remains the exception in terms of interest rates. The minutes of the last RBA meeting offered no surprises, but reiterated the RBA’s hard line, with the implication that it would raise rates again if it judged that inflation would not return to its target until 2026 and/or if it concluded that it is not falling enough compared to the offer. Higher-than-expected inflation and retail sales data and the continued rise in space prices since the last RBA meeting two weeks ago add to the risk of the RBA rising again to further weigh on demand and inflation.
However, rates have still peaked; Here are seven reasons why. Simply put, the RBA will have to be careful not to do too much:
So while we recognize that the threat of another hike is high and assess the probability at 45%, our baseline scenario remains that rates have peaked ahead of rate cuts that will begin early next year. Combine the CPI data for the June quarter together with retail sales for June. and knowledge of employment, as well as early readings of the effect of tax cuts on spending ahead of the RBA’s August meeting will be essential.
Happy songs = satisfied stock markets, or vice versa. A 2022 study in the Journal of Financial Economics “Music Sentiment and Stocks Return Worldwide” found a positive correlation between stock market pullbacks and the positivity of songs other people listen to and a negative correlation with bond yields consistent with safety. -Demand for refuge. Of course, correlation doesn’t necessarily tell us much about causation, and it’s possibly simply that when other people are satisfied, they pay attention to satisfied songs and buy inventory. But anyway, here are some upbeat songs: “Everending Love” via Love Affair and “The Only Way Is Up” via Yaz and the Plastic Population.
Main occasions and economic implications
Last week’s United States economic data was lackluster. Production and ISM indices fell, either below 50, and recorded weak employment figures and a decline in costs paid.
Source: Bloomberg, AMP
In the United States, job openings increased slightly in May and departures remained unchanged, but the trend in both cases remains downward, indicating a weakening of the labor market. Similarly, the June ADP employment survey reports slower employment expansion (although it is a reliable indicator of payrolls). ) and an accumulation of initial and ongoing claims without tasks.
Source: Bloomberg, AMP
The declining attrition rate in the United States, a reduction in the number of people leaving their jobs to start a new one, leads to a further slowdown in wage growth in the future.
Source: Bloomberg, AMP
Eurozone inflation fell to 2. 5% year-on-year in June from 2. 6%, with core inflation solid at 2. 9% year-on-year. Unemployment remained unchanged in May at 6. 4%.
The Bank of Japan’s Tankan business survey conducted in the June quarter showed strong economic conditions.
China’s industrial situation PMIs were weak in June, with the average of the official and Caixin PMIs showing a sharp weakening of the situation in facilities and continued weakness in the manufacturing sector.
Source: Bloomberg, AMP
Australian economic events and implications
Australian economic data has surprised to the upside over the past week, but it’s not so smart at heart. After two months of weakness, retail sales rose by 0. 6% in June, more than expected. However, this seems to be basically because cash-strapped consumers take advantage of year-end sales at the start of the year and the trend remains weak with nominal retail sales inflated due to emerging costs and population growth. Actual user-consistent retail sales are down roughly 7. 5% from their all-time high, bringing them almost back to their post-Delta lockdown lows. Six months ago, spending was boosted by November sales, with a drop in December. The June data, due on July 30 before the next RBA meeting, may show something similar.
Source: ABS, AMP
Weakness in customer spending was also highlighted through the ABS monthly household spending gauge covering retail and broader sales for May, which slowed to just 0. 1% year-on-year, led by a further slowdown in the discretionary (-1. 9% year-on-year) and non-discretionary sectors. spending (1. 8% year-on-year). With inflation running at around 4% year-on-year, this means a further step down on already negative genuine spending growth.
Source: ABS, AMP
Home construction approvals in May also rebounded a stronger-than-expected 5. 5% month-on-month, although that followed several weak months, driven primarily by a 19. 7% month-on-month rebound in home construction approvals. The volatile sets and much of the build in space approvals were due exclusively to WA. A sustainable recovery requires lower interest rates, but we are still far from that. Meanwhile, approvals are soaring at an annual rate of 161,000 per year, which is well below existing underlying demand of around 250,000 homes per year and well below the Australian Government’s target as part of the housing deal. to build 240,000 houses a year. for the next five years, starting today. Training
Source: ABS, amp
CoreLogic spatial value data showed a further increase in the national average spatial value of 0. 7% in June, resulting in an 8% average value increase over the last financial year. The housing shortage continues to weigh heavily on higher interest rates. However, there remains a huge divergence between cities: Perth, Brisbane and Adelaide are prospering, but Hobart and Melbourne are weak. The housing shortage continues to weigh on space prices, but the delay in rate cuts and rate hike announcements risks causing space prices to fall further as it could encourage investors to hold back and increase distressed listings. Melbourne’s weakness, despite Victoria having the second-highest population growth of all Australia’s states and territories, warns that the housing deficit is no guarantee that prices will continue to rise while interest rates remain high.
Source: CoreLogic, AMP
The Melbourne Institute’s monthly inflation indicator for June continues to imply a resumption of the decline in CPI inflation.
Source: Melbourne Institute, AMP
The rate of wage expansion in the new corporate bargaining agreements seems to have peaked, supporting the view that the overall wage expansion is very likely to have peaked as well.
Source: Fair Work Commission, AMP
Finally, the industry’s surplus remained around $6 billion in May, well below its peak of just about $20 billion in 2022, as imports grew more than exports.
What to watch this week?
In the US, the issue will once again be inflation: June CPI (Thursday) is expected to decline to 3. 1% year-on-year from 3. 3% and core inflation will remain unchanged at 3. 1%. 4% year-on-year. Producer value inflation (Friday) is also expected to show a slower annual pace. And small business optimism (Tuesday) is expected to remain weak. The June quarterly reporting season in the US is about to begin. The consensus is that earnings will increase 7. 8% year-on-year, which is expected to be around 10% year-on-year. Excluding technology, consensus expectations point to an expansion of 2. 5% year-on-year.
In Europe, the final circular of the French legislative elections on Sunday will be reflected in the effects. Investors probably assume that the National Rally will win the largest number of seats, but not enough to form a government that would lead to a hung parliament, which would not be wonderful but would be less disruptive and less threatening of a new euro crisis. to see a national coalition government. However, the option for NR to shape a government would be poorly won by markets, leading to a further drop in French stocks and an explosion in bond yield differentials with Germany.
The Reserve Bank of New Zealand (Wednesday) is expected to leave its policy unchanged at 5. 5%.
China’s inflation for June (Wednesday) is expected to remain low, but will rise to 0. 4% year-on-year (from 0. 3%) and manufacturing inflation will be -0. 8% year-on-year (from -1. 4%). Friday) is expected to show a slight improvement in export and import growth.
In Australia, housing finance data for May (Monday) is expected to show a 2% increase. The Westpac/Melbourne Institute Customer Confidence Index for July (Tuesday) is expected to remain weak and could decline following the development of a statement of some other kind. increase, this could be partly offset by strong media policy around tax cuts. The NAB business survey for June will also be published on Tuesday.
Market Outlook
The easing of inflationary pressures, the decision by central banks to cut rates, and customers of a stronger expansion in 2025-2026 deserve to allow for moderate returns on investment in 2024-25. However, with a significant threat of recession, imaginable delays in rate cuts, and significant geopolitical threats, the next 12 months are expected to be more limited and more complicated than 2023-2024. We expect the ASX two hundred to fall by 9% this year and end the year around 7900. A recession is most likely the main threat.
Bonds will most likely generate yields close to current yields, or even slightly higher, as inflation slows and central banks cut rates.
An upward trend in the Australian dollar would likely take it to US$0. 70 over the next 12 months, due to a decline in the overvalued US dollar and a narrowing of the interest rate differential between the Federal Reserve and the RBA.
Ends
Important note: Although every care has been taken in the preparation of this document, neither National Mutual Funds Management Ltd (ABN 32 006 787 720, AFSL 234652) (NMFM), AMP Limited ABN 49 079 354 519 nor any another member of the AMP. Group (AMP) does not represent or guarantee the accuracy or completeness of anything contained therein, including, but not limited to, any predictions. Past functionality is not a reliable indicator of long-term functionality. This material has been prepared with the objective of offering general information, without taking into account the specific objectives, monetary situation or wishes of any investor. An investor should, before making any investment decision, consider the suitability of the data contained herein and seek professional advice, taking into account his or her objectives, monetary situation and wishes. This document is intended solely for the use of the party to whom it is provided. This curtain is not intended for distribution or use in any jurisdiction where doing so would be contrary to applicable laws, regulations or rules and does not constitute a recommendation, offer, solicitation or invitation to invest.
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