October 8, 2018
Australian Markets Weekly – housing correction but no macro downturn
This week, we thought we would look in brief at two important issues and how they are impacting the Australian economy and financial markets.
- These issues are: (i) the strength of the US economy; and (ii) the likely evolution of the Australian economic cycle over the next few years.
- The key takeaways we will argue are: (i) the US economy continues to demonstrate underlying strength, which is pressuring US bond yields higher, dragging Australian longer-term borrowing rates somewhat higher, even without the RBA moving interest rates, while also supporting the US$ and therefore contributing some downward pressure on the $A. NAB’s FX strategists now see the $A as a US$0.70-0.75 currency rather than US$0.75 in the year ahead. Also, as bond yields rise, investors are increasingly questioning whether there will be a more significant valuation-driven correction in US and global equity prices and; (ii) while the Australian housing market is undergoing a correction in both price and activity (though far from uniform across the country) despite a significant deal of negativity in the press and from some commentators – this correction remains moderate at this stage. Furthermore, developments in housing, while important, are arguably over-reported each month relative to the sectors of the economy which are now underpinning growth, namely strength in Infrastructure and Defence and the recovery in mining.
- Customers can assess the net impact of these diverse effects on the overall economy by considering the signal of aggregate indicators of activity, such as SEEK Job Ads, the NAB Business Survey, employment and unemployment trends and the performance of the Australian budget. The former indicators appear to have plateaued at healthy levels in recent months, reflective of continuing reasonable growth in the economy, which has been reflected in a continued improvement in the Australian Budget. Our conclusion – as this week’s headline suggests – is that while there is a housing correction, a macro downturn in the Australian economy, still does not seem particularly likely any time soon.
- Last week was marked by clear step up in global bond yields and a further marked decline in the AUD/USD. The latter reflects the ongoing pull from Emerging Market weakness but was further spurred by comments from Federal Reserve Chairman Powell that US interest rates are still at an accommodative setting (supporting growth) and that there was still a long way to go before US rates get to neutral, let alone a setting that restrains the economy. The US unemployment rate fell another two tenths to 3.7% in September, the lowest since 1969 when the rate then reached a cycle low of 3.4%.
- US 10-year bond yields jumped to the highest levels since 2011, lifting global bond yields, including Australian yields and furthering appetite for the USD. The AUD/USD is trading around 0.7050 this morning, down from 0.73 in late September. Last week, NAB marked down its forecasts for the AUD/USD over the next six months from 0.75 to 0.71. These are shown on the Forecasts page. Ask the FX Strategists if you are a wholesale client and would like to get the Global FX Strategist that spells out these changes in more detail. Given all the above, Thursday’s US CPI report is going to be closely watched.
- After the Golden holidays last week, Chinese markets re-open this week. Yesterday, the PBoC announced an across-the-board 1% cut to banks’ Reserve Requirement Ratios (RRR) effective 15 October, a move designed to inject more liquidity into the banking system and be growth-supportive. The PBoC claims the RRR cut will not create depreciation pressure on the yuan. China releases its September trade balance report Thursday, the September money supply and lending report due as early as this week.
- Locally, the initial focus points will be tomorrow’s NAB Business Survey and WMI Consumer Sentiment on Wednesday. Later in the week, interest will turn to the RBA with the RBA’s Chief Economist speaking to an Economic Outlook Conference on Thursday and the Bank releasing its latest Financial Stability Review on Friday, interest in the state of the housing market and household finances.
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