Market and Economic Update – 11/02/2019
From Raiz CEO, George Lucas.
Central bankers pull back on rate rise plans
Monetary policy was a focus last week, with central bankers in Australia, India and the UK preparing to join a broader retreat from plans to hike interest rates. Even the US Federal Reserve (the Fed) is readying to slow down rate hikes, despite the US economy remaining robust.
There is a realisation that maybe policymakers became overly bullish last year and the Fed in particular overreached by signalling four rates rises for 2018, despite a fragile global economy. We’re now seeing a new-found caution providing “air cover” for other central banks to mark down their rate expectations.
The fourth quarter last year was the turning point. This was when markets began to wake up to a host of political hazards and deteriorating trade relations between the US and China. When markets fall they tighten financial conditions, similar to interest rate hikes, and this has given room for the central bankers to take their foot of the pedals.
US economy sturdy despite shaky global picture
The US economy continues performance robustly, with the 304,000 jobs created in January beating Wall Street expectations and significantly more than the 170,000 economists were expecting. Wage growth, meanwhile, is running comfortably above inflation.
However corporate giants in the S&P 500 index, which generate over a third of their earnings overseas, are sounding the alarm this reporting season about faltering overseas demand in global markets not only China.
Eurozone raises global growth fears
Some of the biggest questions hang over Europe. The European Commission (EC) last week slashed its growth forecast for this year to 1.3 per cent from 1.9 per cent, marking down outlooks for major economies including Germany and particularly Italy.
We do need to keep in mind that the EC is not forecasting recessions just a slowing in growth momentum. That means that Europe is still growing, just more slowly, but the situation could get worse if a solution to Brexit is not found soon.
RBA walks back growth outlook
A global slowdown will have an impact on Australia and the shift by the Reserve Bank of Australia (RBA) last week to a more cautious outlook was driven by concerns that steep falls in house prices and the slowdown in China could choke off domestic growth.
The same could happen in the US, with a slowdown in growth in China, India and Europe feeding through to the US economy. We are not surprised that analysts are now forecasting negative year-on-year growth in S&P 500 earnings per share (EPS) for the quarter we are in.
But we expect the growth rate will rebound later in 2019 as the effect of tax cuts last year washes out of the market. Currently the year-on-year growth rate of S&P 500 EPS is still healthy growing around 15 per cent based on current companies that have reported.
Continued US labour market strength
One indicator that a sustained downturn in the stock market is far from imminent is the prevailing strength of the US labour market as firms continue to hire at a blistering pace.
During the past six months, nonfarm payroll employment in the US has grown by an average of more than 230,000 per month and the six-month moving average has remained above 200,000 since last March. Such strength in the US labour market has rarely been accompanied by an enduring sell-off in the stock market.
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