Market Watch

Market Strategist Evan Lucas talks improved confidence and rising fears over geopolitical risks.

Geopolitics remains the risk to global markets – and by geopolitics, I mean The White House.

Last week, we saw Gary Cohn walk out the door. This week, the last of the ‘big faces’ in Trump’s team left the building – Security of State, Rex Tillerson, and Trump was quick to tweet about it. To top it off, there are reports that H.R McMaster, the President’s National Security Adviser, will likely be let go on Saturday.

I remain convinced that if the volatility we saw in February flares up again, The White House is likely to be a major contributor. Steel and aluminium tariffs announced at the start of March are only the beginning, not the end, of trade wars. We are one tweet away from tariffs or political actions on intellectual property (which would be aimed squarely at China).

Paul Navarro and Robert Lighthizer, the two biggest protectionist forces in The White House, now have the ear of the President. Both have very strong protectionist agendas they wish to roll out – watch this space.

Away from the macro, and drilling down into specific economic inputs, this week we received global inflation and Australian confidence figures.

Global inflation

The US, once again, saw core inflation holding just below the Fed’s mandate level of 2 per cent. At 1.8 per cent year-on-year, those final 20 basis points are becoming harder and harder to accrue. This is the third month in a row at 1.8 per cent. The retail sales figures later in week showed that consumption may be moderating in the US too, which would be another headwind to overall CPI.

However, the Dallas Fed Manufacturing index and the Empire State Manufacturing Index are both at 5-year highs, and good indicators for future inflation. Couple those with average hourly earnings data, coming from non-farm payrolls, and that 20 basis points may finally be secured.

European inflation is also starting to show ‘green shoots’. It’s a long way off the ECB’s target band, but 1.2 per cent year-on-year is the highest level of inflation in the EU since 2010, signalling the Eurocrisis is finally filtering out and economic growth is also on the up over there.

Confidence and conditions

Business confidence and conditions continue to diverge in Australia, as shown by the NAB chart below. Driven by trading profitability, business conditions hit a new record here – you only need to glance at the last earnings season to understand that point. But confidence slipped, even though it’s still in optimistic territory at nine points. The hit to confidence may have something to do with when the survey was conducted, being mid-February, when market volatility was peaking. If this doesn’t reverse in March, that’s when the bigger questions will emerge. The short conclusion is the overall outlook in business is strong. 

Something worth highlighting is the employment component of NAB's report. According to NAB, the surge in the employment index would suggest job growth of around 27,000 per month. Considering the NAB business survey runs approximately six months ahead of the ABS official figures, this suggests a very strong 2018 in employment.

Consumer confidence increased a touch over the month of February to 103 points, the fourth consecutive read in optimism and two points off a 4-year high.

However, this is looking at the whole, and not the parts. The data set holds within it a solid mix of both strong optimism and strong pessimism. For example, current household finances are perceived with real pessimism, while future household finances (12-month view) are perceived with strong optimism. The consumption data tells a similar story, but in reverse – optimistic about the current conditions, but a strained outlook due to expectations of a housing slowdown. 

Nevertheless, the core take-out from both consumer and business confidence is the overlap in employment. The chart above shows that confidence in job security is on the up and up, falling to levels not seen since April 2011. This clearly supports the belief from the business community that employment will remain strong 2018.

So, although the consumer holds slightly mixed views, the overarching belief is that things are improving. This should filter into economic growth later in the year as confidence leads the actuals, such as spending and wealth.


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