Economic Update – February 2018
Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.
Davos endorses Trump economic tax policy
– World growth forecasts upgraded
– 2017 China growth exceeds forecasts
– Australia continues strong employment growth
We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.
The Big Picture
Each year, the powerful and wealthy descend on Davos for the World Economic Forum. Trump attended – against expectations by some – and some key figures backed his new tax policy.
The IMF announced its growth forecasts for 2018 and 2019 had both been upgraded from 3.7% to 3.9% and the IMF Director, Christine Lagarde, attributed this upgrade to Trump’s tax reforms.
Jamie Dimon, the influential leader of JP Morgan, stated that 4% growth for 2018 in the United States (US) was quite possible – again based on Trump’s tax break. Apple had already announced repatriating $US245 bn in cash that will attract a US tax take of $US38 bn.
Some scoffed at Trump’s talk of 4% growth in the US following his election. It seems their mirth was misplaced. Trump is not generally popular but he is effective.
And he’s just started work on his one and a half trillion dollar infrastructure policy.
The latest economic growth figure for quarter four 2017 just missed expectations at 2.6%, but that quarter finished before the tax cuts were enacted.
On top of tax, North and South Korea are not only marching together but fielding a joint hockey team in the upcoming Winter Olympics. Did Trump do that? It’s hard to say but his push for sanctions on North Korea seem to be having some impact – as did his missile barrage on ISIS earlier last year. And the US unemployment rate is at a 17-year low.
The world economies are interlinked. China just posted a growth figure for 2017 ahead of forecasts and even government expectations. As far as investors are concerned, the only take-away is that things are bubbling under quite nicely.
At home, we had yet another strong reading on employment growth but unemployment is still stuck a little on the high side and wages growth just isn’t doing any – let alone heavy – lifting.
Against all expectations, our retail sales came in particularly strongly at 1.2% for November which was well up on October’s read of 0.5% which itself was above previous outcomes.
The United Kingdom (UK) is working through Brexit issues and President Macron, of France, paid a visit to Britain. He expressed very comforting sentiments. UK quarter four growth exceeded expectations at 0.5%, but 2017 as a whole was the weakest since 2012. UK CPI inflation fell slightly to 3.0% from 3.1%. The unemployment rate is at a 42-year low of 4.3%.
Wall Street started 2018 with a bang hitting new high after new high before a pull-back at the end of the month. We had that market sufficiently overpriced before the pull back to cause concern – but not enough to predict a full correction.
New data flowing from the economy and earnings from company statements do bode well for market expectations to be revised upwards over 2018.
The booming world economy has ensured commodity prices have remained firm and, in many cases, they are higher than in the last 6 – 12 months.
Going forward we estimate that gains on the ASX 200 and the S&P 500 for 2018 will likely be more modest than in 2017. Given the rapid start to the year, the S&P 500 might have a small correction if company expectations are not revised upwards as quickly as we expect.
In Australia, the February company reporting season will shed light on the different signals being drawn from employment, growth and consumer confidence. It is unlikely that the banks will shine given the Royal Commission hanging over it. But resource companies might look stronger given global growth expectations. Even Bloomberg felt it worth reporting in a headline that, “China sets new records for gobbling up the world’s commodities.”
Our market fell a little in January. Resource stocks showed some strength and a rally on the last day of the month – during the US State of the Nation address – kept the ASX 200 comfortably above 6,000.
The S&P 500 index recorded a stellar month in January despite a material sell-off in the last few days.
We had the market over-priced by a sufficient amount at the start of the last week of January to argue that the market could correct – but a prolonged sideways movement was more likely given all of the upward pressures on expectations currently being formed.
Bonds and Interest Rates
The RBA does not meet in January. It is unlikely to raise rates before the end of 2018 especially as inflation for the 2017 year was only 1.9%. Indeed, we think another cut is quite possible before the next hike.
The US Fed left rates unchanged at the end of January but the wording in the accompanying statement was slightly stronger about the prospects for hikes in 2018.
The new Fed chairman, Jay Powell, takes the reins on February 1 but most expect little change in the direction of monetary policy. Gradually rising rates over the next couple of years are being factored in. The question is how many.
Oil prices were firmly higher in January. The Australian dollar firmed from $US0.78 to nearly $US0.81 over January.
34,700 new jobs were created in December – the latest published data point – and nearly half of them were full-time positions. However, the unemployment rate rose one notch to 5.5%.
Retail sales stormed home at 1.2% for the month of November after 0.5% for the previous month.
CPI inflation missed expectations at +0.6% for the fourth quarter and 1.9% for the year. The RBA target range for inflation is 2% – 3%.
China had a spurt in trade volumes – notably in commodities. China imports were up 18%.
But the outstanding result was China’s fourth quarter GDP growth outcome of 6.9%. This reading not only exceeded market forecasts but also the government’s own prediction.
The PMI manufacturing number was a slight miss at 51.3 but well above the 50 that marks the difference between an accelerating economy and one that isn’t.
The US started January with a ‘miss’ on jobs growth. 148,000 jobs were created when 190,000 were expected. But the unemployment rate held at the lowest level in 17 years, and the average wage growth was 2.5%.
US inflation was 1.8% which is just below the 2% target level. The latest GDP growth rate was 2.6%.
President Trump gave a rousing State of the Nation Address to Congress where he highlighted the economic successes and other achievements during 2017. The Democrats didn’t seem to be enjoying the lengthy 80 minute speech but it was fine television.
CNBC called 2017 the best year for the EU economy in the last decade. The UK’s unemployment rate is stuck at 4.3%, but that is a 42-year low!
A lot depends upon how Brexit is negotiated, it is a long and complex process. As with the Scottish referendum on staying in the UK, and the last US presidential election, the losers in the elections are “sore losers” so much so that the negative side of the debate is perhaps getting too much exposure.