The past month has seen sharemarkets and other growth assets climb a wall of worry, and that has remained the story over the last week. While economic indicators suggest global growth has slowed, there is still no sign of the double dip recession so feared a month ago. In fact Europe, which was the initial source of this year’s instability, has been surprising on the upside. While we may still see another bout of sharemarket weakness in the seasonally weak months of September and October, we remain of the view that a double-dip recession globally will be avoided. And with shares at very good value, monetary conditions set to remain favourable and China likely to start relaxing its tightening measures in the next few months, shares are likely to stage a strong rally in the December quarter and through 2011.
In Australia, there were no surprises from the Reserve Bank which left interest rates on hold. More importantly, there is little in the RBA’s Statement on Monetary Policy to suggest any urgency to raise rates for the time being with uncertainty around the global outlook having increased, Australian growth around trend, underlying inflation back in the target range and lending rates around long term-average levels. Current interest rates may be appropriate for now, with the RBA still forecasting growth to rise above trend over the next two years and inflation expected to bottom in the top half of the RBA’s target range before starting to rise again. But it is clear that the bank retains a tightening bias and so we continue to expect occasional and gradual rate hikes to resume by year end.
In the week ahead in the US, the Fed is expected to leave interest rates unchanged but the big issue is whether it will step up quantitative easing in the face of the 'unusual uncertainty' regarding the economic outlook. Odds are that it probably won’t as not much has changed since its last meeting. Chinese economic data for July will be watched closely, with industrial production and fixed-asset investment likely to show a further modest slowing in momentum, retail sales growth likely to remain strong and inflation likely to rise to around 3.4 per cent from 2.9 per cent on the back of the flood-driven rise in food prices. The slowing in Chinese growth points to a relaxation of tightening measures some time in the next few months.
In Australia, the July labour market report is likely to show a further gain in employment of around 25,000 jobs, pushing the unemployment rate down to 5 per cent. The National Australia Bank’s business confidence survey for July is likely to show a bounce after the settling of the resources tax issue. Consumer confidence is likely to remain solid, but housing finance data for June will likely remain soft.
The Australian June half profit reporting season will continue, with stocks such as JB Hi-Fi, Cochlear, Commonwealth Bank, Stockland, Qantas and Telstra due to report. Key themes from the reporting season are expected to be: a return to profit growth with earnings per share likely to have risen 10 per cent in the 2009-10 financial year following a 20 per cent slump in 2008-09; a possible increase in dividends reflecting the improvement in cash flows, balance sheets and financing conditions; a negative impact on earnings for European-exposed companies from the strong rise in the Australian dollar versus the euro; and possible caution regarding the outlook for earnings in 2010-11. Resources, banks, media and retail sectors are expected to record the strongest profit growth.