The Week in Review

Reviewing the key global and local developments from this week.

Investment markets and key developments over the past week

Shares had a few wobbles over the past week with a bit of profit taking partly triggered by the US Senate's tax reform bill delaying the corporate tax rate cut until 2019 and its retention of the alternative minimum tax for corporates which could mean higher than intended tax for some companies.

US, Japanese and Chinese shares fell but Australian shares were little changed and Eurozone shares rose. Bond yields were little changed but commodity prices fell. The Australian dollar fell to around $US0.75 in response to softish GDP growth, a sharp fall in the trade surplus and a stronger $US.

Combining the House and Senate tax reform bills is now the main focus in the US, but this should be resolved by year end. Amongst other things this is likely to repeal the alternative minimum corporate tax that the Senate left in as a last minute saving measure and bring forward the corporate tax cut to a 2018 start but with the rate going down to 22 per cent rather than 20 per cent (a move which Trump seems ok with) to limit the blowout in the budget deficit.

The pressure on the GOP to get tax reform done is now immense and having ticked off all the boxes so far (passing a 2018 budget, support in the House and the Senate) the tax reform package looks likely to be passed into law by year end.

Meanwhile, Congress has passed a two-week government funding extension, so no partial Federal Government shutdown from December 9, and a shutdown from December 23 is unlikely too. Because of the large number of outstanding issues on both sides of politics and amongst various factions (eg around defence spending, spending caps, protection for children of illegal immigrants, etc) a longer-term solution was unlikely this week.

However, a December 23 shutdown is unlikely because Congressional Republicans and Democrats are well aware after the 2013 experience of the blame they will take if a shutdown happens, particularly if it's over the Christmas/New Year period. It's also worth noting that there have been 12 shutdowns since 1981 and their economic impact tends to be modest. In fact, US economic growth actually accelerated around the last shutdown in December quarter 2013.

Meanwhile, bitcoin mania continues with another 55 per cent gain over the last week, making for a whopping 17.7 fold increase year to date. While the announcement by the Australian Stock Exchange that it will use blockchain to replace its CHESS clearing and settlement system highlights the huge benefits of blockchain, bitcoin's price surge continues to look like another speculative mania with huge price gains and stories of instant riches drawing attention to it, which is in turn encouraging more and more people to pile onto the bandwagon, which in turn pushes prices even higher, encouraging even more investors to pile in.

And futures trading in bitcoin is on the way making it easier to trade. As John Maynard Keynes pointed out, “the market can remain irrational for longer than you can remain solvent” so it's impossible to know how high it will get and for how long, so shorting it would be very high risk. But while its enthusiasts celebrate its freedom from government involvement and regulation, it will be ironic if they clamour for government help if/when it eventually crashes.

Major global economic events and implications

US data remains consistent with solid growth. While the non-manufacturing conditions ISM index fell in November this may be due to hurricane related distortions and in any case it remains very strong. Meanwhile, jobs related data also remains strong consistent with a very tight labour market.

German factory orders rose in October and are up 6.9 per cent over the last year and consistent with a pick-up in growth.

Japanese GDP growth for the September quarter was revised up to 0.6 per cent quarter on quarter from 0.3 per cent, helped by stronger business investment and adding to evidence that the Japanese economy is a lot stronger these days. That's the same growth rate as Australia but note Japan's population is falling and Australia's is still rising strongly.

The Chinese Caixin services conditions PMI rose in November, but slightly slower growth in exports and imports is consistent with some moderation in growth this quarter.

Australian economic events and implications

The Australian economy saw okay growth in the September quarter with good news on investment but a very weak consumer. The uncertainty around the Australian consumer has been apparent for some time and was highlighted in the September GDP data showing just 0.1 per cent growth in consumer spending, its weakest since the GFC. With the national accounts showing continuing very weak average wages growth (just 0.6 per cent over the last year), energy price hikes cutting into spending power, slowing house price gains in Sydney and Melbourne reducing positive wealth affects and ongoing concerns about high household debt, consumer spending is likely to remain constrained for a while yet. At the same time the housing construction cycle is slowing.

Fortunately, non-mining business investment looks to be picking up at last, the growth drag from slumping mining investment is fading, public infrastructure investment is strong and export volumes are likely to rise solidly helped by a further ramp up in LNG exports all of which should be enough to keep the economy growing and eventually help support a pick up to around 3 per cent growth on a more sustained basis next year.

But for now underlying growth is still subdued at around 2.5 per cent and while good October retail sales may help consumer spending a bit in the current quarter a slump in the October trade surplus suggests this may be offset by weak net exports.

Meanwhile, housing finance slowed again in October adding to evidence that the property market is still cooling.

While it was no surprise to see the RBA leave interest rates on hold at its December board meeting our view remains that the risks around the consumer, weak wages growth and weak inflation mean that it shouldn't and won't start raising interest rates until late 2018 at the earliest and in the meantime another cut still can't be ruled out.

Dr Shane Oliver is Chief Economist at AMP Capital

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