Goldilocks Economy

Originally published by BetaShares

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Global Review & Outlook

• US stocks pushed further into record territory last week as the weaker-than-expected May payrolls report (employment +138k vs. market +185k) portrayed an economy that is neither too hot nor too cold- as Goldilocks might say, it's just right. Importantly, although the unemployment rate edged lower to 4.3%, average hourly earnings remained benign, rising just 0.2% with annual wage growth steady at 2.5%. The tight labour market is likely enough to see the Fed still tighten this month (market probability now around 90%), and at least once more later this year - but with inflation still low, market fears of more aggressive Fed tightening are dissipating, as reflected in further declines in long-term bond yields and the US dollar.

• Two key global highlights this week will be ex-FBI Director Comey's testimony before the Senate and the UK General Election - both Thursday. Barring a smoking gun, I'm sensing the political controversies around Trump should soon fizzle out, allowing markets and Congress to re-focus on fiscal stimulus, with would be more bullish for bond yields and the $US. With the polls having surprisingly narrowed, lingering UK election uncertainty is bearish for the Pound - even more so if there's a hung Parliament.

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Australian Review & Outlook

• The S&P/ASX 200 again lagged global markets last week, as while retail sales and building approvals data bounced back, this did not change what still seems a challenging outlook for both the housing and retail sectors. More ominously, the capital expenditure survey revealed still soft business investment in the March quarter, and a still very subdued outlook for the current and following financial year. Not helping the resources sector, moreover, was further weakness in iron ore prices on the back of still mixed Chinese manufacturing reports.

• The key highlight locally will be Q1 GDP on Wednesday, with market consensus expecting only a very modest 0.3% gain - reflecting both soft business investment, consumer spending and export volumes. Irrespective of the result, Australia is set to break Netherlands' record of the longest quarterly stretch of GDP growth without a technical recession (i.e. two consecutive quarters of negative growth).

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The Wrap

• Despite all the usual risk factors than can be cited, the bottom-line reality is that the global economy is enjoying a period of good growth (which is also broadening to Europe/Japan) and continued persistent low inflation. Against this backdrop, it's hard to be super negative on equity markets, even though outright price-earnings valuations are at above-average levels and earnings growth is still a little patchy. Good growth and low inflation is reflected in continued gains in equity markets even though bond yields and the US dollar have retreated so far this year after the Trump euphoria of late 2016. In turn, such an environment favours the tech heavy Nasdaq 100 especially, and some catch-up performance in Europe and Japan. Meanwhile, sectors that stand to most benefit from rising bond yields - such as global banks - are biding their time.

• Closer to home, local fundamentals don't appear as bright (which is just as well ETFs now make it easier to invest oversea!). Indeed, the market is again flirting with the idea of an RBA rate cut, especially if decent signs of slowing in the Sydney and Melbourne property markets emerge. As a result yield, rather than growth, investment themes are likely to remain favoured locally - which will tend to favour financials (over say, bond proxies like listed property) if longer-term bond yields do eventually start to rise.

Have a great week!