Back From The Brink

Key market positives included: a strong finish to a generally strong US earnings reporting season, relatively benign readings on US inflation, and a further surge in oil prices following the US decision to back out of the Iran agreement.

With almost all S&P 500 stocks having reported, it now looks as if March quarter earnings will be up around 25% on year-ago levels – compared with an annual earnings growth expectation of 17% just before the reporting season began. Also pleasing, is that it’s not just US tax cuts driving the result, but also healthy growth in revenues. The April US consumer price index report was also a little below market expectations, with core annual inflation steady at 2.1%. The benign inflation report follows recently benign US wage reports and generally balanced commentary from Fed officials of late – which all up suggest the Fed is still thinking about only two (or at worst possibly three) further rate rises this year. All that’s been enough to keep US 10-year bond yields at or below 3% – and thereby limiting the downside pressure on equity valuations. Last but not least, Trump’s decision on Iran – which could again restrict Iran’s oil exports – provided a further boost to US energy companies, which continue to figure prominently among the major US equity indices.

Helped by continued strength in resource stocks, which is despite weak iron-ore prices, the S&P/ASX 200's V-shaped recovery also continued last week. Key data was mixed, with a strong rebound in the NAB Index of business conditions yet weak retail spending and signs of gathering weakness in home loan demand and further softness in Sydney property prices. The Federal Budget was overall fairly neutral for markets, with proposed tax cuts not big enough to promise much of near-term boost to consumer spending.

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There’s little in terms of key market-moving US data this week, with the global highlight likely to be China’s monthly “data dump” tomorrow covering areas such as retail sales and industrial production. Chinese officials are unlikely to portray anything other than continued solid and steady growth!

Given the current strength in oil prices, however, investors may find more interest in the latest oil market reports from OPEC and the IEA this week – especially if they indicate a continued tightening in underlying supply-demand fundamentals. At this stage, however, markets are – perhaps a little surprisingly – yet to fret over the inflationary consequences of higher oil prices. In turn, this could reflect an assumption that oil price strength will be temporary, as it mainly reflects supply restriction – which can be easily unwound if need be – rather than especially strong underlying demand.

In Australia, we’ll likely get another weak reading on wage growth when the March quarter wage price index is released on Wednesday (expect annual growth of only around 2.3%), though a likely decent rebound in employment growth in Thursday’s April labour market report after only a weak 5k gain in employment during March. All up, however, the labour market report is likely to suggest a continued cooling in underlying employment growth after last year’s strong performance – making a rate hike from the Reserve Bank even less likely anytime soon.

Have a great week!

Written By: David Bassanese