Category: Countries & Regions

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Employment lifts but S&P 500 tentative

Growth in total non-farm payrolls ticked up to 1.76% for the 12 months to April 2019, supporting Fed reluctance to cut interest rates.

Payroll Growth

The Philadelphia Fed Leading Index has been revised upwards, above a comfortable 1.0%.

Leading Index

Real GDP growth came in at a healthy 3.2% for the 12 months ended 31 March 2019 but growth in total hours worked sagged to 1.47%, suggesting that GDP growth is likely to slow.

Real GDP and Total Hours Worked

Growth in average hourly earnings came in at 3.23% (total private), suggesting that inflationary pressures remain under control. Little chance of a Fed rate hike either.

Average Hourly Earnings

The S&P 500 retracement respected support at 2900. Rising Money Flow indicates buying pressure but gains seem tentative.

S&P 500

US growth looks to continue but commodity prices warn that global growth is slowing.

Nymex crude penetrated its lower trend channel, warning of a correction. Despite the supply impact of increasing sanctions on Iran and Venezuela, and the threat of supply disruption in Libya.

Nymex Light Crude

A similar correction on DJ-UBS Commodities index reinforces that global demand is slowing.

DJ-UBS Commodities Index

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Australia’s irrelevant election

Satyajit Das spells out the challenges facing the Australian economy in the next decade:

The centerpiece of both major contenders’ campaigns are large tax cuts and significant government spending on infrastructure and welfare. Both parties pay lip service to sound public finance. But the sustainability of policies based on outbidding political opponents and financing permanent expenditure with impermanent revenues is questionable.

….This striking lack of control that Australia has over its economy is grounded in four factors.

….Sadly, no party’s manifesto addresses these fundamental challenges. Tax cuts will not reform a system which needs to be overhauled. Infrastructure spending provides a short-term increase in demand. Bad choice of projects and poor delivery, evidenced by the disappointing National Broadband Network which is over-budget and slow by the best international standards, may not enhance longer-term efficiency and productivity.

The narrowness of the economic base is ignored. No political party is willing to address over-investment in housing, the total value of which is around $6 trillion or around 4 times gross domestic product and constitutes a large proportion of household wealth. Encouraged by complex subsidies, capital is locked up in property, unavailable for more productive activities such as new industries. Leaders are reluctant to champion forceful structural reforms to improve education and skill levels as well as streamline regulation. Instead, all contenders seem happy to rely on windfalls to finance the nation’s living standards through ever shorter electoral cycles.

Worth reading the full article at Nikkei Asian Review

Hat tip to Macrobusiness.

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Australian bank growth expected to slow

Last week I observed:

…the RBA will resist cutting rates unless the situation gets really desperate. Ultra-low interest rates encourage risk-taking and speculative behavior, offering short-term gain but courting long-term disaster. Walter Bagehot, editor of The Economist, observed more than 100 years ago: “John Bull can stand many things, but he cannot stand 2%.” Sound economic management requires that central bankers make the hard choices, resisting pressure from commercial banks and politicians.

Total assets of the four major banks grew at a much faster rate than nominal GDP from 2004 to 2014. This was only achieved through rapid expansion of debt in the economy.

Major Banks Total Assets and Nominal GDP

The sharp rise in debt pushed households into a precarious position, with record levels of debt to disposable income and a serious bubble in house prices.

Australian Household Debt to Disposable Income

The RBA and APRA have used macro-prudential measures over the last few years to rein in debt growth, with some success. The ratio of major bank total assets, mainly debt, to nominal GDP declined considerably since 2015.

Major Banks Total Assets over Nominal GDP

This is a major policy success by the RBA and APRA and they are unlikely to want to reverse course. But they may decide to slow, or even for a time halt, the decline in order to prevent a downward spiral in the housing market. Expect total asset growth of the big four to match nominal GDP growth, at around 5.0%, over the next decade. Comprising 3.0% real GDP growth and 2.0% inflation. A far cry from the heady days of 10% annual growth between 2004 and 2014.

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ASX 200 bull trap

The ASX 200 retreated below its new support level at 6350, warning of a bull trap. Declining Money Flow peaks indicate selling pressure. Expect retracement to test support at 6000.

ASX 200

With the Aussie Dollar testing support at 70 US cents, international investors are noticeably skittish, as illustrated by price action in REITs over the past few weeks. Penetration of the rising trendline warns of a correction.

ASX 200 REITs

ASX 200 Financials is also retracing, to test its new support level at 6000. Lower peaks on the Money Flow indicator warn of secondary selling pressure.

ASX 200 Financials

Banks face headwinds from a declining housing market and the RBNZ call for an additional $8.1 billion in common equity capital (as estimated by S&P Global Ratings).

Materials have started a correction after penetrating its rising trendline. Expect a test of support at 12000. Declining Money Flow peaks warn of strong selling pressure.

ASX 200 Materials

I remain cautious on Australian stocks, especially banks, and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

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Nasdaq breaks resistance

Real GDP growth came in at a healthy 3.2% for the 12 months ended 31 March 2019. Growth in total hours worked is lagging below 2.0%, suggesting that further acceleration is unlikely.

Real GDP and Total Hours Worked

Growth in total non-farm payrolls continues at close to 2.0%, minimizing the chance of an interest rate cut by the Fed.

Payroll Growth

The S&P 500 is testing its previous high at 2940, while a rising Trend Index (13-week) indicates buying pressure.

S&P 500

The Nasdaq 100 broke resistance at 7700, signaling another advance. Expect retracement to test the new support level. The long-term target is 9000.

Nasdaq 100

A rapid advance would outstrip earnings growth, with high earnings multiples warning of elevated risk. The market is quite capable of continuing this behavior for an extended time but I urge readers to be cautious and look for rising sales and earnings to support the stock price.

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ASX 200 breakout

ASX 200 Financials broke resistance at 6050, signaling continuation of the up-trend after a weak correction. Rising troughs on the Trend Index indicate buying pressure. The next target is the August 2018 high at 6450.

ASX 200 Financials

Low inflation, with March Quarter CPI at 0%, increases the chance of another RBA rate cut. Short-term market response to this has been positive but we need to remember that the RBA will only cut rates, which are already at record lows, if the economy is going down the gurgler.  Banks also face headwinds from a declining housing market and the RBNZ call for an additional $8.1 billion in common equity capital (as estimated by S&P Global Ratings).

Materials penetrated the rising trendline after encountering resistance at 13500. Expect another test of support at 12500.

ASX 200 Materials

The ASX 200 broke resistance at 6350, signaling another advance. Expect retracement to test the new support level (at 6350). Respect would strengthen the bull signal.

ASX 200

Long-term (LT) target for an advance is 7400 but I remain cautious on Australian stocks, especially banks, and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

I suspect that the RBA will resist cutting rates unless the situation gets really desperate. Ultra-low interest rates encourage risk-taking and speculative behavior, offering short-term gain but courting long-term disaster. Walter Bagehot, editor of The Economist, observed more than 100 years ago: “John Bull can stand many things, but he cannot stand 2%.” Sound economic management requires that central bankers make the hard choices, resisting pressure from commercial banks and politicians.

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S&P 500: Rate cuts and employment

Ten-year Treasury yields rallied for the last two weeks but remain in a down-trend. Respect of resistance at 2.60% would warn of another decline.

10-year Treasury yields

Inflation is subdued and it would be difficult for the Fed to motivate a rate cut when inflation is close to its 2.0% target. The consumer price index (CPI) came in at 1.86% for the 12 months to March 2019, while the more stable Core CPI (ex- Food & Energy) remains close to target at 2.04%.

CPI and Core CPI

After price stability, the second part of the Fed’s dual mandate is to maintain maximum sustainable employment. A review of the last three cycles shows the Fed raising the funds rate (FFR) to curb inflation and then being forced to cut (red highlights) when growth in employment slows.

Payroll Changes and Fed Funds Rate

Total non-farm payrolls are currently growing at close to 2.0%. The Fed would normally need payroll growth to slow by at least 1.0% to motivate a rate cut. The exception is if inflation falls below target, then the Fed may act sooner.

The S&P 500 is headed for another test of its high at 2950, while Trend Index (13-week) recovered to signal moderate buying pressure.

S&P 500

The Nasdaq 100 is similarly testing its earlier high at 7700.

Nasdaq 100

Momentum is slowing and we can expect stubborn resistance at the former highs.

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ASX 200 divergence

REITs and Utilities found support, partially recovering from their sell-off last week.

ASX 200 REITs

Financials continue to test support at 5800; breach would signal another test of primary support at 5300.

ASX 200 Financials

The RBA sums up the outlook for banks in its April 2019 Financial Stability Review:

“Analysts expect minimal growth in bank profits over the year ahead. Net interest income growth is expected to be below average as credit growth slows further and NIMs [net interest margins] remain under pressure. Bad and doubtful debt charges are also expected to pick up a little from their current very low level. The final cost of remediation for misconduct identified over recent years is uncertain, and could exceed existing provisions, while spending on compliance and IT may remain elevated in order to address some of the recommendations of the Royal Commission. Overall, there appears to be greater-than-usual uncertainty about the future profit outlook for banks because of the increased scrutiny on banks and the weaker outlook for property prices and housing credit growth.”

Materials encountered resistance at 13500, with a lower peak on the Trend Index warning of selling pressure. Another test of support at 12500 is likely.

ASX 200 Materials

The ASX 200 is heading for another test of resistance at 6350 but divergence with a declining Trend Index continues to warn of a correction. Expect stubborn resistance at 6350, followed by another test of 6000. Breach of 6000 would signal another correction to test primary support at 5400/5500.

ASX 200

I remain cautious on Australian stocks, especially banks, and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

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S&P 500: Expect slower earnings growth but no sign of recession

Credit growth in the US above 5% shows no signs of tighter credit conditions from an inverted yield curve. Growth in the broad money supply (MZM plus time deposits) has also not slowed, remaining close to 5%.

Credit Growth and Broad Money Supply

Growth in hours worked has slowed to 1.71%, suggesting that real GDP growth will dip below 2% in 2019 but remain positive.

Hours Worked and Real GDP growth

The Fed is unlikely to cut interest rates when average hourly earnings are growing at 3.2% (Total Private for the 12 months ended March 2019).

Average Hourly Wage Rate

The Leading Index from the Philadelphia Fed fell below 1%, giving an early warning that GDP growth will slow.

Philadelphia Fed Leading Index

A similar dip below 1% occurred ahead of the last three recessions. A second, stronger dip would warn of recession ahead.

Philadelphia Fed Leading Index

The S&P 500 is advancing to test resistance at 2950/3000, while the Volatility Index crossed below 1%, signaling that risk is no longer elevated.

Treasury Yields

Real GDP is likely to slow this year but remain positive. S&P 500 earnings growth is expected to slow and the index is likely to meet stubborn resistance at 2950/3000. The Fed is still a long way off cutting interest rates (a strong bear signal) and there is no sign of recession on the 2019 horizon. An extended top is the most likely outcome.

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ASX 200 offshore investors retreat

The ASX has undergone a sell-off in the last two days, presumed to be offshore investors withdrawing from Australian investments.

Bell Direct equities analyst Julia Lee (Thursday) said it appeared that overseas investors – or even just one large player – had pulled their money from the Australian market, as losses were concentrated among the ASX’s top 20 companies. (thebull.com.au)

Worst hit were REITs.

ASX 200 REITs

Followed by Utilities.

ASX 200 Utilities

ASX 200 Financials are testing support at 5800, while the Trend Index warns of a correction. Breach of 5800 would signal another test of primary support at 5300.

ASX 200 Financials

Materials continue their advance, benefiting from the iron ore windfall.

ASX 200 Materials

The ASX 200 retreated from resistance at 6350. Declining Trend Index warns of a correction. Breach of 6000 would confirm.

ASX 200

I remain cautious on Australian stocks and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

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