Love Trump Or Fear The Fed?

LOVE TRUMP OR FEAR THE FED?

Table

Global Markets

• "Trumps trades" were generally still in vogue in a US-holiday shortened trading week, albeit with some waning enthusiasm given its now three week's since The Donald stormed to power. U.S. 10-Year yields flattened out, while S&P 500 stocks eked out further modest gains to set a new record high for the Index (as alluded to last week). The $US edged ever-higher, pushing gold down further, while the Crude Oil market still clung to hopes that OPEC would eventually strike a producer deal. Supporting markets is the fact that Trump still appears reasonable, with rumours of some respected people - like Mitt Romney - forming part of his new administration.

• Global highlights this week will include US payrolls on Friday, the Opec meeting on Wednesday and the Italian referendum on Sunday. Markets are anticipating a solid payrolls report (+175k) and anything other than a very weak result (say sub-100k) should confirm the now consensus view that the Fed will hike rates next month. Oil could pop higher later this week given it seems likely - in my view - OPEC will agree to at least some form of "face-saving" deal on Wednesday. If not, oil will likely slump badly - look out below! As regards Italy, while the referendum seems lost, hope is building that Prime Minister Renzi might ditch his threat to resign - and thereby spare the country even further political instability via a care-taker Government and yet another election.

• More broadly, the US equity rally is looking a little stretched technically, and some consolidation this week seems likely - perhaps with markets starting to "fear the Fed" again and the "Trump trade" now close to fully priced. I'd note that US equity valuations still remain high and so ever vulnerable to rising bond yields - the market is (perhaps overly so) counting on a Trump-led rebound in currently sluggish corporate profits, which is a big ask given a tightening labour market and strong $US.

Chart

Australian Markets

Table

• In Australia, the main event last week was the weaker than expected Q3 construction report, with weakness in both residential and non-residential construction. Add to this is the already known weak Q3 retail sales result, and it means next week's Q3 GDP result will struggle to remain in positive territory - partly a payback from upside surprises in Q1 and Q2. Of course, the construction report did not stop local equities basking in Trump-related optimism, supported by the fact iron ore prices surged further! Even REITs staged a comeback despite local bond yields edging higher.

• We'll learn more on the economy with this Thursday's Q3 capital spending report, which will provide an update on business investment intentions for the coming financial year. Overall it should show mining investment still very weak, with only modest offsetting gains expected in non-mining investment. Oct. building approvals (Wed.) and retail sales (Friday) are the other data highlights.

• The growing focus on weak GDP over the coming week or so could add to downside pressure on the Australian dollar and keep hopes alive for an RBA rate cut in 2017. As I've previously argued, the RBA will need to see encouraging signs of annual underlying inflation lifting from 1.5% to 2% by early 2017 to ward off a rate cut by May.

Chart

The Wrap

• This week may see a shift in market focus from the "Trump trade' to "fear of the Fed". After some consolidation last week, that could see global bond yields move higher, while equities could at least pause for breath. Fed fears are also generally bullish for the $US - though this also appears overbought in the short-run. A focus on a weaker Australian economy would be negative for the $A.

Have a great week!