For the full details, download the full report: Australian Markets Weekly 3 December 2018

• Earlier today, the ABS released its quarterly Business Indicators data. While much of the focus tends to be on GDP implications, we take the time today to deep dive into trends in profitability – highlighting key industry-level trends.
• These trends have been helpful in explaining the much-improved Budget position. Corporate profitability has surged in Australia over the past two years, with companies’ gross operating profits now running just above $90bn per quarter. While Mining has been extremely important in driving the rise, profits for the non-mining industries have also risen strongly.
• Of particular interest, we note surprising strength in profit growth for both Retail Trade and Rental, Hiring & Real Estate Services – both of which fly in the face of soft Retail Business Conditions in the NAB Survey and the correction in Housing now underway in major east coast cities.
• The AUD/USD began this week at 0.7372, almost 0.7 cents higher than when markets went home on Friday night at 0.7303, as news of a US-China trade ceasefire saw a risk-positive reaction that saw a rally in the AUD. Plans for an increase in tariffs from 10% to 25% on $200bn worth of Chinese imports have been postponed, starting a 90-day timer for a US-China agreement to be reached. While clearly good news, the US-China relationship remains strained and there are a number of contentious issues that still need to be resolved. Markets will likely remain cautious, and attentive to US-China related news flow.
• There are lots of key global watch points this week. Highlights will be Fed Chair Powell’s Testimony (Wednesday), US Payrolls (Friday) and ISMs (Monday, Wednesday), the Caixin PMIs (Monday, Wednesday) – data in the US and China have both been under focus as some signs of slowing activity have emerged. Elsewhere, Brexit negotiations, Bank of Canada meeting and Canadian jobs data will keep markets busy.
• Locally, it’s a huge week ahead for Australian data, with Q3 GDP on Wednesday the highlight. NAB expects Q3 GDP rose a solid (but softer) 0.5% q/q, bringing year-ended growth down a touch to 3.2% (from 3.4%). In the lead up to Wednesday, GDP partials (Company Profits, Inventories, Net Exports) will be closely followed, while markets will also keep an eye out for a range of monthly activity data throughout the week with building approvals (Monday), Retail Sales (Thursday) and Trade (Thursday).
• From the RBA, there’s the Board meeting on Tuesday and Deputy Governor Guy Debelle delivers a speech on Thursday titled Lessons and Questions from the GFC. There’s zero expectation of a change in policy from the Bank, but, as always, any commentary on its assessments of risks will be key.

Chart of the week: Mining profits surge

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