Category: GDP and Activity

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Australian Jobs versus Rate Cuts

The RBA is expected to cut interest rates by 50 basis points next week, with a further 25 basis points in June, according to the NAB economics team.

CPI declined to a low annual rate of 2.4% in the first quarter, well within the RBA’s target range. However, the rate jumped to 0.9% (3.6% annualized) in the latest quarter.

Australian CPI - Quarterly & Annual

While this gives the RBA some leeway, the labor market remains strong, warning of the dangers of cutting too early.

Unemployment is a healthy 4.1%.

Australia: Unemployment

Employment continues in a strong uptrend.

Australia: Employment

The wage price index reversed its recent decline, rising by 3.4% over the past 12 months, while the quarterly rate increased to 0.9% (3.6% annualized), signaling underlying inflationary pressure.

Australia: Wage Price Index

However, monthly hours worked dipped slightly, with the monthly trend falling by 0.1%, warning of a slowdown ahead.

Australia: Aggregate Monthly Hours Worked

Business confidence is also weak. NAN April business confidence remains below zero, while current business conditions are steadily declining.

NAB Business Confidence & Conditions

Cash flows are suffering, according to the NAB business survey, falling to their lowest level since 2020.

NAB Business Cashflow

Forward orders have been contracting since 2023.

NAB Business Forward Orders

The slowdown has affected the retail and wholesale industries the most, but mining and transport & utilities show the steepest monthly declines.

NAB Business Forward Orders by Industry

Declining capital expenditure warns of an economic contraction and slowing growth ahead.

NAB Business Capital Expenditure

Conclusion

The Australian economy is gradually slowing, but unemployment remains low, leaving the RBA with a difficult choice: cut rates in anticipation that unemployment will rise, or wait for the actual data? We would argue that they should hold firm while unemployment is low, but that seems to be a minority view.

Acknowledgments

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ASX Weekly Market Snapshot

Bull-Bear Market Indicator
Stock Market Pricing Indicator

The dial on the left indicates bull or bear market status, while the one on the right reflects stock market drawdown risk.

Bull/Bear Market

The ASX Bull-Bear Market indicator remains at 54%, with three of six leading indicators signaling risk-off, while the US bull-bear index (a 40% weighting) is at 60%:

Bull-Bear Market Indicator

The ASX 200 continues in a strong downtrend relative to the gold price in Australian Dollars.

ASX 200 Index Relative to Gold in AUD

The ASX 200 Financials Index (XFJ) is retracing to test resistance at 8500, but remains in a primary downtrend.

ASX 200 Financials Index

Stock Pricing

ASX stock pricing increased to the 76.18 percentile compared to 74.05 two weeks ago, and a high of 85.83 in February.

Stock Market Value Indicator

The Stock Pricing indicator compares stock prices to long-term sales, earnings, and economic output to gauge market risk. We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

Conclusion

The ASX bull-bear indicator at 54% indicates a mild bear market.

We are entering a bear market, and the risk of a significant drawdown is high.

Acknowledgments

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US Weekly Market Snapshot

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The dial on the left indicates bull or bear market status, while the one on the right reflects stock market drawdown risk.

Bull/Bear Market

Our Bull/Bear Market indicator is unchanged at 60%, with two of the five leading indicators signaling risk-off:

Bull-Bear Market Indicator

We replaced the Coincident Economic Activity Index with Current Economic Conditions from the University of Michigan’s monthly consumer survey. The UOM index offers earlier recession warnings—when the 3-month moving average crosses below 100—and more timely updates.

University of Michigan: Current Economic Conditions

The current reading of 68.20 is a strong bear signal. The Fed Funds target rate is also in a bear cycle, but the two require confirmation from one of the following two indicators:

If the Chicago Fed Financial National Conditions Index rises above -0.40.

Chicago Fed National Financial Conditions Index

Or the S&P 500 30-week Smoothed Momentum crosses below zero.

S&P 500

Stock Pricing

Stock pricing eased slightly to the 95.67th percentile from a high of 97.79 six weeks ago. However, the extreme reading still warns that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

The Stock Pricing indicator compares stock prices to long-term sales, earnings, and economic output to gauge market risk. We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

 

Conclusion

There’s little change this week. We are close to a bear market, with the bull-bear indicator at 60%. Stock pricing is still extreme, highlighting the risk of a significant drawdown.

Acknowledgments

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Fed sits tight as economic outlook darkens

The Fed has kept the funds rate steady at 4.25% to 4.5% since December. The threat of a trade war and the increased risk of a sharp price jump have ensured Fed caution over further rate cuts. The FOMC dot plot below shows four participants expect no cuts this year, another four expect one cut of 25 basis points, and eight more expect a total of 50 basis points.

FOMC Dot Plot

FOMC projections identify rising uncertainty over GDP growth and greater risk of an undershoot.

FOMC: GDP Risk

Consumer expectations of inflation soared in the March University of Michigan survey, with the median price increase in the next year jumping to 4.9%.

University of Michigan: 1-Year Inflation Expectations

Expectations of future conditions fell sharply to 54.2.

University of Michigan: Consumer Expectations

Stocks were buoyed by Fed Chair Jerome Powell’s view that tariff-driven inflation will be “transitory” and largely confined to this year. (Reuters)

The Dow Industrial Average rallied to test resistance at the former primary support level of 42,000.

Dow Jones Industrial Average

The S&P 500 recovered some ground but encountered resistance at 5700, below the former primary support level.

S&P 500

Long-term Treasury yields benefited from the outflow from equity markets in February and March, with the 10-year testing support at 4.1% before increasing to 4.25%. A further fall in stocks would likely cause a short-term softening of UST yields.

10-Year Treasury Yield

Upward pressure on US Treasury yields will likely come from doubts over the current administration’s economic strategy and concerns over a debt-ceiling stoush. US credit default swap spreads (CDS) have increased by 200% since December.

United States Treasury: 1-Year Credit Default Swaps

A sharp upturn in the Chicago Fed National Financial Conditions Index warns of tightening financial conditions, with credit spreads widening.

Chicago Fed National Financial Conditions Index

The Fed confirmed they will reduce the monthly redemption cap on Treasury securities from $25 billion to $5 billion. This will slow the withdrawal of liquidity from the Treasury market through the QT program.

Conclusion

The Treasury market has shown that it is still vulnerable to thin demand and requires Fed support to maintain liquidity in the long-term end of the curve. The Fed has been forced to cut monthly QT for Treasury securities to $5 billion. At the new rate, it would take the Fed more than 70 years to shed its present holdings of $4.24 trillion.

Fed Security Holdings

Stocks are rallying but are unlikely to reverse the recent bear market signal.

Acknowledgments

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Inflation spooks Treasuries and stocks

Rising inflation expectations and robust economic data mean the Fed will likely pause rate cuts for several months. Stocks reacted negatively, but gold seemed unfazed.

The US economy shows slow but steady growth, with total weekly hours worked growing at an annual rate of 1.0% compared to real GDP at 2.5% in 2024.

Real GDP & Total Hours Worked

Heavy truck sales, a reliable leading indicator, fell sharply in December but rebounded to a robust 44.5K in January.

Heavy Truck Sales

Another reliable leading indicator is employment in cyclical sectors, which also shows robust growth. In a recession, manufacturing, construction, and transportation & warehousing typically shed far more jobs than the rest of the economy.Employment in Cyclical Sectors: Manufacturing, Construction, and Transport & Warehousing

ISM Survey

ISM business surveys show continued expansion in the services sector in January.

ISM Services PMI

It was joined by a manufacturing recovery above 50% after 26 months of contraction.

ISM Manufacturing PMI

Labor Market

The labor market added a modest 143K jobs in January.

Employment Growth

However, the unemployment rate fell to 4.0% from 4.2% in November, possibly aided by a surge in deportations.

Unemployment

Average weekly hours worked fell to 34.1 for the first time since the 2020 pandemic. This typically serves as an early warning of increased layoffs. Employers first cut back hours before shedding staff.

Average Weekly Hours

Lower weekly hours is contradicted by the JOLTS report, which showed job openings exceeding unemployment in December.

Job Openings

Average Hourly Earnings

A sharp increase in average hourly earnings, showing 4.1% growth for the 12 months to January, will likely cause concern at the Fed.

Average Hourly Earnings

December earnings growth surprised, at close to 0.5% for the month or 5.7% annualized.

Average Hourly Earnings - Monthly

University of Michigan Survey

Consumer sentiment dipped slightly in February, with the 3-month moving average declining to 71. Sentiment remains below levels during the 2020 pandemic.

University of Michigan: Consumer Sentiment

The current economic conditions index declined to 68.7 in February, but the 3-month MA is still rising.

University of Michigan: Current Economic Conditions

Expectations are also falling, with the 3-month MA declining to 70.

University of Michigan: Consumer Expectations

Financial markets were spooked by the sharp jump in expected price increases in the next 12 months, which reached 4.3% in February, with the 3-month MA at 3.5%.

University of Michigan: 1-Year Inflation Expectations

Five-year inflation expectations are also rising, with the 3-month MA climbing to 3.2% in February.

University of Michigan: 5-Year Inflation Expectations

Treasury Market

Ten-year Treasury yields rallied in response to the stronger inflation outlook, testing resistance at 4.5%. Recovery above the descending trendline would warn of another advance.

10-Year Treasury Yield

Stocks

The S&P 500 fell sharply in response to the prospect of higher interest rates. Breach of 5850 would signal a test of primary support at 5800.

S&P 500

Dollar & Gold

The Dollar rallied, testing resistance at 108 in response to higher interest rates. Breakout would offer a short-term target of 110.

Dollar Index

Gold is retracing to test support at $2,850 per ounce. Respect would signal a test of $3,000.

Spot Gold

Silver broke its new support level at $32 per ounce, warning of retracement to test $30.

Spot Silver

Conclusion

Strong growth in average hourly earnings and rising consumer inflation expectations will likely cause the Fed to pause rate cuts until the current uptrend reverses. That could take more than six months.

10-year Treasury yields are expected to resume their uptrend. Recovery above 4.5% would confirm.

Rising long-term yields are bearish for stocks, with the S&P 500 likely to test primary support at 5800.

The Dollar Index is also expected to resume its uptrend. Breakout above 108 would signal another test of resistance at 110.

Gold is expected to continue its uptrend, with a breakout above $2,900 per ounce signaling a test of $3,000 for the first time. Rising inflation expectations and increased bullion holdings by foreign central banks will likely maintain a shortage of physical gold.

Acknowledgments

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US Weekly Market Snapshot

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The dial on the left indicates bull or bear market status, while the one on the right reflects stock market drawdown risk.

Bull/Bear Market

The Bull/Bear Market indicator rebounded to 60%, due to data revisions to heavy truck sales. Two of the five leading indicators now signal Risk-off:

Bull-Bear Market Indicator

Heavy truck sales were revised up to a seasonally adjusted 37,823 units in December, after an earlier report at 35,152 units. January sales jumped to a hot 44,499 units confirming that economic activity is not slowing.

Heavy Truck Sales (units)

This is the second time that a heavy trucks data revision has affected our model. We will investigate using a 3-month moving average to reduce the impact of revisions.

Stock Pricing

Stock pricing eased slightly to 97.75 from the 97.91 percentile two weeks ago. The extreme reading continues to warn that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

The Stock Pricing indicator compares stock prices to long-term sales, earnings, and economic output to gauge market risk. We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

Conclusion

We are close to a bear market, with the bull-bear indicator revised to 60%. Stock pricing remains extreme, increasing the risk of a significant drawdown, warning not to increase exposure to risk assets like growth stocks.

Acknowledgments

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Threat of a US-China trade war boosts gold

Donald Trump’s reversal on tariffs on Canadian and Mexican imports caused a sharp rebound in the S&P 500. However, tariffs on Chinese imports remain in place and have elicited a response from the Middle Kingdom.

Stocks

The S&P 500 retraced to test resistance at 6000. Respect would confirm a correction.

S&P 500

Six of seven mega-cap technology stocks showed losses, with only Meta Platforms (META) recording an up-day.

Top 7 Technology Stocks

Financial Markets

Financial market conditions remain stimulative, with Moody’s Baa corporate bond spread narrowing to 1.45%, the lowest level since 1997. This indicates the ready availability of credit.

Moody's Baa Corporate Bond Spreads

Treasury Markets

Ten-year Treasury yields continue to test support at 4.5%. Respect will likely confirm an advance to test resistance at 5.0%.

10-Year Treasury Yield

US Economy

ISM Manufacturing PMI improved to 50.9%, the highest level in 27 months, indicating a recovery in the sector.

ISM Manufacturing PMI

New orders jumped to 55.1%, indicating expansion.

ISM Manufacturing New Orders

However, the Prices sub-index also increased, indicating inflationary pressures.

ISM Manufacturing Prices

Leading industry sectors also warn of a slowing economy. Airfreight and logistics (blue) plunged by more than 10% and would flag a recession ahead if joined by a decline in either containers and packaging (orange) or road and rail (green).

Leading Industry Sectors

China Tariffs

China has slapped tariffs on US imports in a swift response to Donald Trump’s duties on Chinese goods, renewing a trade war between the world’s top two economies as America’s President seeks to punish Beijing for not halting the flow of illicit drugs.

Mr Trump’s additional 10% tariff across all Chinese imports into the US came into effect at 12.01am Eastern Time on Tuesday (5.01am GMT).

Within minutes, China’s Finance Ministry said it would impose levies of 15% for US coal and Liquid Natural Gas and 10% for crude oil, farm equipment and some cars and trucks. The new tariffs on US exports will start on February 10, the ministry said.

China also said it was starting an anti-monopoly investigation in Alphabet Inc’s Google, while including both PVH Corp, the holding company for brands including Calvin Klein, and US biotechnology company Illumina on its “unreliable entities list”.

Separately, China’s Commerce Ministry and its Customs Administration said it is imposing export controls on tungsten, tellurium, ruthenium, molybdenum and ruthenium-related items to “safeguard national security interests”. China controls much of the world’s supply of such rare earths that are critical for the clean energy transition. (Evening Standard)

Dollar & Gold

The Dollar Index retreated from resistance at 110, but respect of support at 108 will likely confirm another test of 110. The threat of increased tariffs is expected to strengthen the Dollar and increase upward pressure on long-term interest rates as foreign central banks sell reserves to support their currencies.

Dollar Index

Gold broke resistance to set a new high at $2,816 per ounce. Expect retracement to test the new support level at $2,800, but respect will likely confirm our target of $3,000.

Spot Gold

Conclusion

Canada and Mexico are a sideshow, with China likely to be the primary target of US sanctions imposed by the Trump administration. China’s swift retaliation is expected to lead to escalation.

China is in a far weaker position because of its large trade surplus with the US. A trade war is expected to hurt Chinese manufacturing and raw material imports. However, the US will also likely suffer an economic slowdown as global trade shrinks.

We expect the Dollar to strengthen, driving up long-term Treasury yields, which would be bearish for stocks and bonds.

We also expect a trade war to boost demand for gold as central banks reduce their exposure to US Treasuries.

Acknowledgments

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Australian retail sales and building approvals

Seasonally adjusted retail sales grew by 0.5% in volume terms in the September quarter.

Australia: Retail Sales

The headline number, however, disguises the underlying stress consumers are experiencing. Per capita retail sales are falling steeply.

Australia: Retail Sales per Capita

The RBA is unlikely to act on this, however. Instead, it will focus on headline numbers like dwelling approvals, which have broken their recent downtrend.

Australia: Building Approvals

Conclusion

A November rate cut remains unlikely.

Acknowledgments

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GDP gradually slowing

Real GDP growth slowed slightly to 2.66% over the twelve months ending in Q3, compared to 3.04% for the previous quarter.

Real GDP Growth

Real quarterly growth is essentially unchanged at 0.70% (2.8% annualized) in Q3.

Nominal GDP & Real GDP, Quarterly

Nominal GDP growth (gray below) slowed to 4.94% for the four quarters ending in Q3. Ten-year Treasury yields are lower, indicating that monetary policy remains supportive.

Nominal GDP & 10-Year Treasury Yield

This is borne out by the Chicago Fed National Financial Conditions Index at a low -0.56.

Chicago Fed National Financial Conditions Index

Credit markets also signal strong liquidity, with Moody’s Baa corporate bond spread narrowing to 1.49%.

Moody's Baa Corporate Bond Spreads

Conclusion

Real GDP growth is slowing gradually, as expected during a rate-cut cycle. Financial market liquidity remains strong, and there is nothing particularly concerning.

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ASX 200 jumps to new high

A strong September jobs report boosted the ASX 200 to a new high of 8355, confirming our target of 8500 for this year.

Labor Market

The Australian economy added a seasonally adjusted 64,100 jobs in September, according to the latest Labour Report, well above expectations of 25,000.

Australia: Employment

The unemployment rate remained steady at 4.1%.

Australia: Unemployment

The surge in jobs was absorbed by an increase in the participation rate to a robust 67.2%.

Australia: Participation Rate

Aggregate hours worked also improved to 1,968 million in September, a 0.3% increase compared to the 0.2% average over the past 12 months.

Australia: Aggregate Hours Worked

Business

Strong labor conditions failed to inspire business confidence, with NAB business confidence (black below) declining to -6 pts in the third quarter.

NAB Business Confidence

Wage costs were the number#1 issue affecting business confidence:

Issues Affecting Business Confidence

The Mining industry (red below) recorded a sharp drop in confidence.

NAB Business Confidence by Industry

Stocks

The ASX 200 rallied through resistance at 8300, confirming our year-end target of 8500.

ASX 200 Index

The ASX 200 rally was led by a strong surge in Financials, which is headed for a test of resistance at 8600.

ASX 200 Financials Index

The ASX 300 Metals & Mining Index remains tentative, weighed down by falling demand from China. Breach of support at 5600 would warn of another test of long-term support at 5000.

ASX 300 Metals & Mining Index

On the other hand, the All Ordinaries Gold Index is testing its July 2020 high at 9500. Breakout would offer a long-term target of 14500. The soaring gold price and falling energy costs have boosted margins, with diesel a substantial cost in extraction and transportation.

All Ordinaries Gold Index

Conclusion

A strong jobs report boosted the ASX 200, which recorded a new high of 8355, confirming our target of 8500 for the year.

Strong employment growth suggests that the RBA is unlikely to cut interest rates before next year. Instead, the hawks will be keeping a beady eye on inflation.

Business confidence remains low, with Mining especially hard hit by sluggish demand from China.

The Financials sub-index is headed for a test of resistance at 8600. Breakout would offer a medium-term target of 9200. The All Ords Gold Index is also bullish, testing its 2020 high of 9500. Breakout would offer a long-term target of 14500. Metals & Mining, however, remain bearish.

Acknowledgments

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