Starting of this week’s Economic update is news that US equity markets continued to rally to new highs, with the tone remaining positive as investors grew increasingly optimistic that Congress would reach a deal to cut corporate taxes. All three major US indices, S&P 500, Dow Jones and Nasdaq all closed at record highs ahead of a vote on the proposed tax legislation later this week. European stocks were also higher, with the STOXX 600 index making the biggest gain in 5 months led by gains across car manufacturers, real estate and technology stocks. In the UK PM May addressed Parliament on plans for Brexit, giving the UK pound cause to rally. Markets will gradually start to thin as the holiday break approaches and from tomorrow we expect volumes to be significantly lower for both currency and equities.
Australia had its Mid-Year Economic & Fiscal update out yesterday which showed little major change. The 2017/18 budget deficit is projected to be $23.6bn, some $5.8bn lower than the May Budget forecast of $29.4bn. This was more than accounted for by a $6.9bn increase from revisions to previous forecasts. Over the four years to the 2020/21 period the cumulative deficit should be A$9.3 bio less than expected in May, now at A$36.6 bio currently. This improved budget position is driven by revisions to the forecasts, providing a boost of $11.2bn, with revenues $2.4bn higher and expenses undershooting by $8.8bn. As well, higher company tax returns and better than expected superannuation tax receipts are expected to more than offset the impact of slower wages growth and softer economic growth in 2017/18. Real GDP growth was downgraded to 2.5% for 2017/18 (back from 2.75%) and is unchanged at 3.0% for the remaining three years. Later this afternoon the RBA will release minutes of the December meeting, few surprises are expected with the RBA reflecting in the December statement that they are comfortable with the Current level of the AUD. The Australian dollar (AUD) continues to trade above the 0.7600 level against the USD and may test 0.7700 later in the week.
New Zealand (NZD)
Out today the Westpac McDermott Miller Consumer Confidence Index showed a drop of 5 points in the December quarter to a level of 107.4. This leaves confidence at below average levels. Given the suddenness of the drop, it is likely that the outcome of September’s election has had a big impact on household sentiment. It would appear that households are more concerned about the general economic environment and their personal financial situation. This will put a dampener on spending plans ahead of the holidays. Tomorrow morning will bring another Global Dairy auction, futures markets are pricing in a small gain, but given the accuracy of previous forecasts this is far from certain. Thursday then sees key GDP data from NZ with the market looking for a gain of between 0.4% and 0.6% for the quarter. This would be down from last quarter’s 0.8% result. The New Zealand dollar (NZD) continues to trade around the 0.7000 level against the USD.
United States (USD)
Bull markets reign in the US equity market this week as stock markets rally ahead of the expected Republican tax reform legislation which is expected to be passed into law later in the week. President Trump gave a major speech on Foreign Policy this morning in which The national security strategy, a document mandated by Congress, described the Trump administration’s approach to a range of global challenges including North Korea’s nuclear program, international terrorism, Russian aggression and China’s rising influence. With a heavy focus on trade relationships, Trump sought to make the case that U.S. economic prosperity was critical to national security. The strategy document is tough on both China and Russia, which it describes as “revisionist powers” seeking to upend the global status quo in which the U.S. is the world’s only superpower. But Trump was more conciliatory in his speech, describing the two nations as both potential rivals and partners. Markets had little movement on this speech release.
Political focus in Europe remains on the German attempt to put together a new government three months after the election. Merkel does not want to lead a minority government, and the SPD does not want to lose its identity in another coalition government. Both blocs do not want to return to the polls as in the September election, both saw their public support fall to post-WWII lows. Eurozone data continues to be positive with inflation remaining below expectations, with November CPI coming in at -0.1% below expectations at -0.2%. This gives annualized for November at 0.9% against the expected 1.0%.
United Kingdom (GBP)
The Brexit drama rumbles on, with the EU’s chief negotiator, Michel Barnier, commenting that there’s “no way” the UK will have a bespoke trade deal after leaving the EU, indicating that Britain must “face the consequences” of their decision. UK PM May, on the other hand, spoke yesterday at the House of Commons, saying that moving to the next phase of Brexit negotiations was an important step on the way to a smooth and orderly Brexit. The UK economy continues to produce more positive results. Data out yesterday from the Confederation of British Industry (CBI) showed that British factories are benefitting from an export boom as the weaker pound and demand from the strong Eurozone economies leave manufacturers with the biggest order books since 1988. Its survey found 42% of manufacturers increased output in the past three months while just 11 % reported lower output. In another survey indications were that more businesses across the economy are planning to hire more workers out into next year. The GBP/USD surged to a daily high of 1.3418 but was unable to hold these levels settling back around the 1.3400 level, helped by broad dollar’s weakness and strong local data, as according to the latest CBI survey, manufacturing orders held at 30-year highs.
Japanese data continues on a positive note with exports rising for a twelfth straight month in November on the back of buoyant overseas demand and confidence among nation’s biggest manufacturers is at an 11-year high. A report from news agency Bloomberg commented “a yearlong recovery in exports has kicked Japan into a high gear, fuelling record profits and rising capital spending during the longest economic expansion since the mid-1990s.” The question is will this eventually lead to higher inflation? If the past decade is anything to go by, then probably not. The Japanese Yen continues to track sideways against the USD albeit with a slight upward bias.
Canadian data continues to be positive with Merchandise trade figures better than expected and October building permits coming in above forecasts. There is a raft of further Canadian data out later this week including inflation, retail sales and GDP. The NAFTA negotiations continue, with no new breakthroughs.
Major Announcements last week:
• US CPI 0.4% as expected
• UK Average Earnings Index 2.5% as expected
• FOMC increases interest rates to 1.25 – 1.5% as expected
• Australian Employment data 61.6k vs 18.1k expected
• UK Retail Sales 1.1% vs 0.4% expected
• Bank of England leaves rates unchanged at 0.5%
• US Retail Sales 0.8% vs 0.3% expected
• ANZ NZ Business Confidence -37.8