Global Markets
Solid economic data and a reasonably benign inflation report provided further reassuring signs to Wall Street last week that the US economy remained on a “soft landing” track. Even Powell’s ongoing threat of two additional rate hikes is being taken in its stride – on the view that the economy appears resilient enough to withstand it. Core inflation is high and slowing less quickly than headline inflation, though the trend at least appears downward.
Perhaps a greater near-term risk to markets is not that the US economy suddenly slips into recession, but that it remains too strong or reaccelerates – particularly the labour market. In this regard, key reports this week on jobs growth, job openings and jobless claims will provide an important temperature check.
Fundamentally, the US equity market appears richly valued, which does make it vulnerable to surge higher in bond yields if growth reaccelerates and the Fed becomes a lot more hawkish. But otherwise, economic resilience is now being reflected in a levelling out in earnings expectations – if inflation continues to ease in the face of a still solid “goldilocks” economy, lower interest rates and higher earnings could be the catalysts for the next leg higher in equity prices.
Soft landing hopes continue to favour growth/technology/quality exposures over value/commodity exposures – which, in turn, is not favouring the local Australian markets compared to global peers.
Australian Market
There were mixed local economic data last week – with an encouraging decline in monthly inflation though a solid rebound in consumer spending. This likely leaves this week’s RBA decision another line-ball event. On balance, I suspect the RBA will give more weight to the apparent resilience in consumer spending and house prices and hike rates again on Tuesday. Though there is a risk it could hold off until August and await the more detailed quarterly CPI result due later this month.
Either way, the RBA appears concerned that the global disinflationary forces now underway could be less evident in Australia – not helped by local supply tightness in the energy and housing markets. Although these are supply issues, solid demand aggravates the pressure on prices in both sectors and, more generally, is making it easier for both workers and businesses to seek compensatory wage and price gains.
Given these cost pressures, the RBA likely wants to ensure a decent slowing in economic growth – and a rise in unemployment – to limit second-round inflation effects.