Political reshuffles, trade wars, and June jobs data

This week we discuss political reshuffles, how the markets are coping with trade wars, as well as jobs data for June.

For the answers, I turned to:

• • Callam Pickering, economist at Indeed.com;
  • Evan Lucas, Chief Market Strategist at InvestSMART;
  • Diana Mousina, senior economist at AMP Capital; and
  • Peter van Onselen, contributing Editor at The Australian. 

G’day and welcome to Talking Finance, I’m Alan Kohler.  This week all eyes were on Helsinki and the jungles of Northern Thailand, so not much action elsewhere.  But in some ways the most interesting thing is the way markets have held up under the weight of trade war threats.  So far, it’s all insouciance, so we’ll look into that with market strategist, Evan Lucas, and economist at AMP Capital, Diana Mousina.  As well as yesterday’s jobs data for June with Callam Pickering of Indeed.com.  And on politics I’m pleased to be talking to one of Australia’s best political commentators, or at least I think he is, Peter van Onselen.

But let’s kick off with jobs and Callam Pickering.

[Music]

Callam, the last time I spoke to you we talked about how jobs growth this year had fallen off from last year’s stellar numbers, but we’ve got the latest month is 50,900 new jobs.  Can we say that it’s back now, we’re back to strong growth again?

CP:  Well, certainly the June outcome was much stronger than we’ve seen over the course of 2018.  But nevertheless, if you look at average growth over 2018 thus far it is still a fair bit below where it was last year.  Last year we averaged almost 34,000 jobs a month.  This year we’re closer to 31,000.  Nevertheless, if we were to replicate what we’ve seen in the first half of the year or over the second half of 2018, then we’d still have a pretty solid year for the Australian labour market. 

Yeah right, and I note that actually the unemployment rate is 5.37% - obviously they rounded it up to 5.4%, but at 5.37% seasonally adjusted it is the lowest unemployment rate in five or so years, isn’t it?

CP:  Yeah, that’s right, we’re gradually drifting downwards.  5.37% is certainly much better than we’ve been for some time.  I think you have to go back to late 2012 since we’ve last been down at that level.  Nevertheless, labour market slack in Australia is still pretty high.  Increasingly, economists look at measures a lot broader than the unemployment rate.  We look at the number of people who are underemployed as well, people who are looking for more hours.  If you look at those measures in tandem, you come to the conclusion there still is a high level of late market slack in Australia.  There’s still a lot of people out there either looking for work or looking for more hours.  There’s still much progress to be made.

Were there any details in the release that caught your eye?

CP:  The really pleasing result from my perspective is that 80% of the increase in employment was driven by full time employment.  That’s important because certainly throughout 2018 thus far we haven’t seen much full time employment.  Last year, full time employment accounted for around three-quarters of employment growth, this year it’s about one-third, so that’s a big decline from last year.  But certainly June was very different, a much stronger result.  Hopefully that maintains over the second half of the year.

Now I’m joined by Evan Lucas to talk about the markets.  Evan is the Chief Market Strategist at InvestSMART.  Evan, the market’s holding up pretty well in all the uncertainty about trade wars and looking at the year to date, the ASX200 and the MSCI Global Index are up about the same or 2-3% each.  It’s interesting that so far so good on the market front.

EL:  Yeah, it is interesting because it’s this buffer, isn’t it, that you wouldn’t normally expect.  Considering that our largest trading partner is in a bear market as we alluded to with regards to what’s happening in Shanghai and also on the Shenzhen composites.  They’re under a lot of pressure.  You’re seeing one of our major exports in terms of commodities being copper in the last sort of 6-8 weeks fall as much as 15%.  Normally you would expect that to come through as you alluded to on the markets.  You’ve probably seen it to some extent in the currency, but the market has been resilient.  It’s interesting, what’s probably added points particularly over the period we’re talking about, it is the banks.

I’m not saying they’re back to where they were, but they’re pretty much neutral now, so they’ve put some points back in to the points they took out in March and that’s what you’d expect.   The banking Royal Commission has certainly been an impactor there, the issues around funding and possibilities of future changes that the banks could do around their interest rates in the coming months has certainly been a factor.  But in the main we’ve remained quite resilient and we haven’t been anywhere near the level of volatility that we’ve seen in Europe or even looking at the US markets as well have been quite choppy considering what’s been going on.  It’s interesting we have been insulated.  It’s a question of whether or not over the coming years we can do that, but so far so good. 

It’s not just the banks.  The miners are holding up pretty well as well, even though as you say the copper price is down, but the iron ore price I think is all right and coal is also okay, so the materials index has basically flatlined for the past couple of months…

EL:  It has.  If you look at the last few months, completely agree.  It actually was elevated and has remained elevated, only just dropped below the banking index for the last 3 months and I actually try and take a bit more of a longer term view.  If you look over the last 12 months it’s up over 18.5%, the materials index, whereas the banking index has only just crossed back into positive territory over that one year period.  And it should be the case that they have outperformed, we’re in a growth market globally.  You can’t dispute that despite the possible issues around geopolitics and what we’ve just alluded to.  It is still a growth market, you are seeing that and being told that by central bankers in the US, here in Australia and also in Europe. 

The data shows you that it’s a growth market and materials therefore should and have performed as they have.  If we do continue to see the iron ore price, and I completely agree here, holding relatively steady, so between USD$65-75 a ton it will again just add that buffer in our markets that we’re not being completely cajoled around like we have seen overseas from trade wars. 

What do you think investors should be looking out for apart from obviously developments in trade?

EL:  Let’s put that to one side.  Right now, the most interesting sort of thing going on over the next sort of 5-6 weeks is earnings seasons across the globe.  US earnings season is well and truly underway and so far it’s been pretty stellar.  A lot of people highlight Netflix and what happened to their share price on Monday, but if you actually look at the underlying numbers being released on an earnings per share growth perspective, they’re hitting to beating consensus.  Consensus was for EPS growth year on year of 20%.  It’s still a very small sample, but the US is currently averaging about a 21.2% EPS growth year on year.  That is astoundingly strong, you can’t deny that.  Fundamentally, it’s very positive, explains why the NASDAQ’s making another record all time high, because they’re part of that.  You also saw even really good numbers from US banks that have done some big driving, so Morgan Stanley – case in point, Bank of America – case in point.   Then you’ve got our earnings season, that’s coming up, technically starts next Friday with G.U.D. which is a company not many people follow but it’s sort of the signal of the start of our earnings season and looking at particularly what we just talked about with materials, the production reports that have been coming out over the last sort of week and a bit are really strong, they’re at the upper end of their ranges.

Short term, there are fundamental upside reasons that can actually support our market and that I think is a really positive thing.  There is a bit of doom and gloom and it has sort of come out of nowhere over the last sort of three months and let’s be honest, it has come from the White House and the White House disruption.  But underlying, the economics that we’ve seen over the last year are strong and they’re now filtering through into the actuals that we’re seeing from earnings.

There have been a few earnings downgrades in Australia over the last few months, what’s called the ‘Confession Season’, but they’re not that many and they haven’t been that big.  Overall, the downgrades look pretty good, so the Australian earnings season you’d have to say is looking okay.

EL:  Yeah, it is and I would agree with you.  Those that have downgraded have had structural reasons to do so.  The overall trend, as you just alluded to, is that things should be good.  Again, looking at the growth side of the market, things like materials, things like industrials.  The one I think will be a bit of a beacon as always, will be CSL.  They’ve got some very interesting things to report in terms of their structural growth in the US and Europe – what they’ve been reporting quarterly looks very, very strong and probably explains why they went to $200 in the last week and a bit. 

Then you also have to look at the growth in the US in housing, despite what they released this week which was a little bit disappointing, has been pretty good over the last half.  Your US exposed building manufacturers here in this country being people like James Hardie, being people like Boral, have also been fairly sanguine in their release, which normally tends to mean that they’re going to tell you something pretty good.  Growth companies, as I said to you, in growth areas, industrials and those materials places who tend to look like they’ll probably drive our earnings season.

Now to talk about the week in economics, which has been a bit of a quiet week actually, I’m joined by Diana Mousina who is Senior Economist at AMP Capital.  Diana, it was a quiet week in Australia in economics this week but we had a testimony from Jay Powell, the new Chairman of the Fed in America.  What did he say?

DM:  Well, the key things that he mentioned was really this confirmation that the US economy was still firmly on track to record very strong growth this year.  They’re probably at around 3% or so which is well above the US potential at 2%.  Markets receive that confirmation that the hike for September from the Federal Reserve is still very much on track and December is very likely as well. 

Powell did note that the US economy might not actually be at full employment just yet, which I saw some commentators were saying looked a bit odd given that the unemployment rate now is well below the Fed’s own forecast for where it would be at this time.  But I suppose you need to look at broader indicators of the labour market, things like wages growth which haven’t picked up as much as you’d expect.  That still clearly indicates that you have that spare capacity in the economy.

I suppose the confirmation that there’ll be a September rate hike wasn’t all that surprising and the markets didn’t really react much to it.

DM:  Yeah, that’s definitely true.  I think that the confirmation from Powell that the US economy is still growing well was kind of the trigger that markets needed to continue upward momentum this week, particularly in the US.  But you’ve also seen much stronger earnings growth than expected from the banks this week, even though expectations were already for a pretty good earnings season.  Markets are expecting earnings to be up about 20% year on year, which is a very good outcome but we’ve seen outperformance.  I think that’s the key reason why markets have gone higher this week.

In Australia we had the Reserve Bank minutes, they’ve reinserted the idea that the next move is likely to be up, which they left out last month.  How significant do you think that is?

DM:  Well, I think that by them leaving out that comment last month we did see a few commentators start to shift to the idea that perhaps the RBA might be hiking later than expected or perhaps even that the next move would be a cut.  We’re still of the opinion that you can’t actually rule out a rate cut from the RBA, even though the RBA wants to think that it will be hiking next time round, they themselves can’t forecast what’s exactly going to happen in the economy. 

For us, the key risks around the housing market, lower dwelling price growth and the impact that that has on a consumer that’s already in a very weakened state, means that you can’t rule out that possibility that we may need to see a cut here.  There’s a lot of pressure on the banks at the moment through increased funding costs and through them increasing some mortgage rates across the spectrum.  We still think that the RBA will be hiking in 2020, but the risks we think are still towards a cut in the near term.

Yeah.  When I read the minutes the general impression that you got was that the RBA’s getting a bit worried.  They specifically talked about how vulnerable households are because of the higher level of debt and they also mentioned the trade tensions going on and that that’s a worry for global growth.  You sort of got this sense that they’re worried, while also saying that the next move is likely to be up.

DM:  Yeah, that’s a great summary of, I guess, the RBA’s position at the moment.  Australia, as a small open economy, is very much influenced by what happens in the global environment and the trade tensions globally will not just impact the US and China but will obviously impact the global supply chain and Australia is very much included in that because we don’t know the ramifications of how the supply chains will change between the US and China.  I think that that’s just a big risk that the RBA can’t really value at this stage.  Also, the concern that’s going with emerging markets is something that would be weighing on the Reserve Bank.

We still think that there’s a good chance you’ll see some more policy stimulus coming out of China in the near term.  We’ve already seen some easing of liquidity conditions there, but more is likely to happen because Chinese policy makers are trying to prop up growth at a time when they’re also focusing on deleveraging in some sectors and some other kind of controls around pollution and the environment which will obviously pull down growth in some sectors.  If you see that policy stimulus coming from China then I think that would be a very big positive influence into Australia.

Now, joining me to talk about the week in politics, here’s Peter van Onselen, contributing Editor at The Australian and a political academic.  Peter, obviously the news this week has been dominated by events in Helsinki and in North Thailand, but there’s been a couple of things going on which you’ve been talking about.  Firstly, the replacement of the Treasury Secretary, John Fraser, with Scott Morrison’s Chief of Staff, Philip Gaetjens.  What do you think of that and how’s that going to go?

PO:  I do think it’s a politicisation and I don’t say that to be unfair to Gaetjens because he does have a pedigree in terms of his bureaucratic background.  He was appointed by an albeit Liberal Government in New South Wales to their Treasury Secretary position, but going much further back than that before he was even Peter Costello’s Chief of Staff, he was the acting Deputy Secretary or one of the acting Deputy Secretaries at the federal level, initially under Labor and then for a while under the Coalition with the ’96 change of government. 

He has a pedigree there, don’t get me wrong.  The issue I have is the proximity of the political to the now.  It wasn’t that long ago that he was Scott Morrison’s Chief of Staff and it’s the perception side of it rather than the reality.  I’m certain that as an individual he’s more than capable of separating the two professionally, but in an optics perspective I think it’s a problem for the Government and that’s really about the politics.  I think the government thinks that it’s a good appointment to put him in, but actually when it comes to the politics of it it just gives Labor an excuse to dismiss any Treasury criticism that might happen when it comes to their funding for example or any of the like. 

What does it tell you about the thinking in the Coalition and the Government, what does it tell you about their attitude?

PO:  It tells me that they’re interested in having what they would see as a political ally in the Department of Treasury rather than somebody that at arms’ length is seen as being highly robust without any political connections at all.  We know for years on both sides of politics that Government Departments have been infected by political appointments and to some extent, so has Treasury.  But if you had to pick one department from my analysis that has generally stood above that fray more than others, it would be Treasury.   It tells me that the Government, as we get to the pointy end of the electoral cycle with MYEFO coming up, they like the idea of having an ally in there.

It might also tell you that they were caught a little bit on the hop with John Fraser’s departure, because of course Phil Gaetjens already had an appointment that he’d just been made to which he’s pulling out of to take up this role.

Yeah and I suppose the other thing it tells you is they don’t really care what anyone says or thinks about it.

PO:  Well, that’s true and I think that’s silly politicking because the biggest, if you like, opportunity that Labor could have would be to be able to cast doubt on any independent Treasury commentary which is negative about them and their policy settings.  This gives them their get out of jail card, so if the government don’t care what people think in terms of the perception, you’ve got the reality of the situation, or more for-them’s I think politically.

Speaking of Labor, interesting first paragraph on the commentary about them this week from you.  The decision the Labor MPs need to weigh up is, what is the lesser evil?  Suffering the inevitable transaction costs of rolling a leader or going into the next election with a leader who is a drag on the party boat, and obviously we’re talking about Bill Shorten.

PO:  It’s unusual.

Well, I mean, goodness me, another leadership change, really?

PO:  It’s unusual to be so negative.  I think I might have said this further into the piece, it’s unusual to be so negative about an opposition that has led on news poll for 36 consecutive polls.  You would think that that would equate to riding high, but the latest one is 51/49 on the two party vote and a number of those leads over those 36 consecutive polls have been at the closer end of the spectrum compared to 6 or 12 months ago.  The reason it’s so negative is because of the personal numbers of Bill Shorten.  I’m certainly not convinced that Labor will roll Bill Shorten, I’ve got great respect for his internal political manoeuvring skills, so I can see him beating Anthony Albanese whether that’s in their best interests or not.

But what I’m also not convinced by is whether, as you mentioned, those transaction costs of change are really worth it for any side of politics.  We’ve seen some pretty stark examples of just how much the public has had a gutful for that.  What I don’t know though is whether that translates to opposition.  Traditionally, oppositions can roll their leader on the eave of an election and it’s not a problem.  I mean, Bob Hawke did it incredibly successfully ahead of ’83 and it’s happened countless other times.  Latham would of course be the unsuccessful example.  But that is a real weigh-in for them. 

Bill Shorten’s unpopular, he will personally be a drag on their vote but he’s not a bad strategist.  However, if you roll him, yes the data tells us that Anthony Albanese is more popular, but does that last after a bloody coup?  It doesn’t always last after a bloody coup and can cause voters to shake their heads.  It’s an unenviable choice for a party that should be feeling pretty good because they’ve been in front for so long.

But do you think that Bill Shorten’s personal numbers could actually mean the difference between winning and losing the next election and that Albanese would win it for them alternatively?

PO:  It could.  I certainly wouldn’t rule that out but I think it’s more likely to make the difference between is between them only winning as a minority government or for example with the slenderest of majorities versus perhaps being able to win in a wipe out.  If – and there’s a lot of if’s here – if the transaction cost of change can be avoided and if Albanese’s popularity that exists now were to continue in the leadership where you have much more scrutiny on you, if all of those things added up I think he would be in a position to take advantage of community angst with the government.

However, Bill Shorten doesn’t have that because he’s a known quantity and he’s an unpopular known quantity at that.  I could see under Bill Shorten’s leadership despite angst with the Government, there’s been enough angst with him as leader and possibly the opposition a bit large, that he struggles to get those seven or so seats that he needs to get a majority in his own.  You’re looking at another case of 2010 all over again. 

Just finally, Peter, where do you think we now stand on the National Energy Guarantee?

PO:  Oh, that’s a tough one, predictions in that space are really difficult.  It looked for a while there, Josh Frydenberg was managing to keep all the balls in the air, negotiate with all the parties and therefore get something done.  I’m now starting to see not just the break-outs that have occurred on his right flank, which have always been manageable.  The party room, Tony Abbott, the Nationals, that’s always been manageable.  It’s the break-outs on his left flank from any state or territory or indeed Federal Labor that is the bigger risk to him getting this deal done because it’s an all or nothing.  He needs every single state and territory or else the whole deal collapses, you can’t exclude any one of them and the ACT is the hardest because not only are they an alliance government with the Greens but it’s a Green that has carriage for this particular portfolio responsibility.  If there’s not too many break-outs of descent about the NEG on the left flank, I can see the ACT falling into line because they’re a small fish.  But we’re starting to see a bit more angst than that and if I was Josh Frydenberg I’d be worried about that and we’re now hearing as recently as late this week that Federal Labor are starting to ask questions of their own about it.

Surely the Greens are suffering some remorse over their failure to pass Kevin Rudd’s emissions trading scheme in 2009 and remember that?  God!

PO:  You would think so and they should but self-perception is not always at the top of the list of attributes of Greens and I don’t know that they are – I’ve asked them that many times in interviews if they are.  It’s deep in the subconscious or they’re at least not willing to admit it if that’s the case, but certainly from most of our perspectives letting the perfect be the enemy of the good is exactly what the Greens did way back then and if they hadn’t we probably wouldn’t be having these debilitating climate change wars now because we would have moved on like a lot of other parts of the world have.

Happy Birthday Carlos Santana, 71 today.  Song of the Wind is still my favourite guitar solo.  That’s it for Talking Finance this week, you have a great week and I’ll be back next Friday.