Important TCI news, Powell, The “Barbell”, Two Mines, Life On Mars, and more…

Last Night’s Markets
TCI to merge with Eureka Report
Powell The Dove?
The “Barbell” May Be Back
Two Mines
Life On Mars
Research and Diversions
Facebook Live
Next Week
Last Week

Last Night’s Markets

TCI to merge with Eureka Report

I have some exciting news! The Constant Investor is merging with Eureka Report, having been acquired by InvestSMART, the listed company that now owns it. I will become Editor in Chief of the group and a significant shareholder.

From next week, on top of all of the existing TCI content, including MarketTiming, you will start to get access through TCI to selected Eureka Report content, chosen by me, and within a month or two you will get full access to InvestSMART’s “Essentials” content and investment tools, valued at $330 per year, for the same price as you are paying now for The Constant Investor.

I never intended to sell TCI, as you know, but this was an offer – for you – that was simply too good to refuse.

I started Eureka Report in 2005 with my friend James Kirby and financial backing from investment bankers John Wylie and Mark Carnegie and publisher Eric Beecher. In 2012 it was sold to News Corporation and in 2016 they sold it to InvestSMART.

After that, and having served a four-year contract with News, I left to start The Constant Investor, this time entirely on my own – with the help of my daughter Phoebe.

From my point of view, owning 100% of the business and not having to answer to anybody has been great, but to be honest it gets a bit lonely. I love working with Phoebe and the rest of our small team here at TCI, but I miss being part of a bigger group.

So I’m really looking forward to working with InvestSMART chairman Paul Clitheroe and CEO Ron Hodge to help make our services the best they can be.

The final sealer on the deal was InvestSMART’s decision a few weeks ago to cap the fees on its investment products at $451 per year. As you probably know, I have been campaigning against percentage fees for a while now because of the way they compound along with investment returns and end up costing way too much.

To date percentage fees have been an exercise in cross-subsidisation from large balance clients to small balance clients, which in my mind is not fair to larger balanced clients. InvestSMART with its innovative investment platform have worked out how to solve this problem and simply capped the fee starting at $99 to $451 p.a. with a low percentage fee of 0.55% in between.

So Paul and Ron are not only in possession of my first baby, they are fully aligned with my philosophy on investing – the need to move away from percentage fees that keep on compounding, to a simple subscription for investment management services, as well as editorial content and research for those who want to invest on their own.

There’s a bit of work to do in putting TCI and Eureka Report together, but I will tell you when I know how the integration is going and when you should be able to access the full suite of services from InvestSMART.

If you’re not a previous Eureka Report member and aren’t familiar with it, I urge to give it a try when you get the chance – it’s still basically the same as it was when I ran it, with most of the same people providing the same great insights and ideas.

Powell The Dove?

In short – don’t believe it.

And by the way, this is the most important thing for investors to think about at the moment – apart from all the other things we need to worry about, such as Australian housing and debt, bank regulation, China’s economy, Brexit and Donald Trump. Phew!

The US market reacted powerfully on Wednesday with the second biggest one-day jump of the year, after Fed chairman Jerome Powell made a speech in New York in which he replaced the words “a long way from neutral” (rates, that is, said in a speech in October) with the words “just below”.

But there may not actually be much difference between those two phrases.

The current target band for the Fed Funds rate is 2-2.25%. The estimated range for the neutral rate – that is, the rate at which GDP is growing at trend and inflation is stable, so it could be renamed Goldilocks – is between 2.5% and 3.5%.

The full quote from Powell’s speech this is: “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy–that is, neither speeding up nor slowing down growth”.

Those words on Wednesday and the ones in October were both arguably just statements of fact: 2.25% is indeed “just below” the bottom of the neutral range, but it’s also a “long way” from the top of the range, or even the mid-point. So maybe nothing has changed, just a shift in emphasis.

Of course, the market didn’t see it that way and focused on the emphasis. But after a dreadful October investors were hanging out for some hope and this, they decided, was it – Powell has switched from hawk to dove.

The fixed interest market took a different view, however: the 2-year Treasury note yield – generally regarded as the most sensitive to the Fed funds rate – fell a grand total of 2 basis points, so hardly any change at all. Longer yields hardly reacted at all.

When it comes to judging interest rates, the “bondies” are usually better than the equity investors, who tend to trade more on hope.

In fact, as the FT’s Alphaville column said yesterday: “The Fed just doesn’t need the markets — particularly equity markets — the way those markets need the Fed. So investors interpret messages, they send signals, but they can never have the commitment they so desperately crave. They grow angry with their own futility.

Ever been in an asymmetrical relationship? It makes you a little crazy.”

Very funny – it’s a one-way love affair.

The other thing is that nobody can really agree on what the “neutral rate” is, which is why there is such a wide band of estimates. But it’s not too difficult. Over the past 60 years, the Fed funds rate, on average, has been around 100 basis points – 1% – below the prevailing trend in nominal GDP.

Right now that’s 5.5%, but that’s temporarily high because of Trump’s fiscal stimulus. For 2019, the Fed is forecasting 4.5%, which would put the neutral rate at 3.5% – the top of the range of estimates and a “long way” from the current Fed funds rate!

The stockmarket bulls who piled into the market on Wednesday were happy to believe that the bottom of the range applies and that the Fed will therefore raise rates once or twice and then pause.

The trouble with that idea is contained in the rest of Powell’s speech on Wednesday, and there are a few bits of note:

  • “My FOMC colleagues and I, as well as many private-sector economists, are forecasting continued solid growth, low unemployment, and inflation near 2 percent”
  • As for the financial system: “After 10 years of concentrated effort in the public and private sectors, the system is now much stronger, with greater capacity to function effectively in stressful time”.
  • And … “household debt would not present a systemic stability threat if the economy sours”.

On the stockmarket, he didn’t raise any concerns about recent volatility, and only said: “It is important to distinguish between market volatility and events that threaten financial stability.”

He did add that: “Large, sustained declines in equity prices can put downward pressure on spending and confidence.”

But so far there has been nothing particularly large, or sustained. If there is, presumably the Fed will react.

So there’s nothing in Powell’s speech to suggest that the conditions are close to being right for a pause in interest rate hikes by the Federal Reserve, and in my view investors would be wise not to get carried away with prospect of it happening.

But the conditions are there for some kind of “Santa Claus rally”, which is supposedly what usually happens.

Chris Weston of Pepperstone actually sent me a chart during the week of the average ASX 200 pattern between January 1 and December 31 for the past ten years, that shows it does happen … the average lift in the last two weeks of December is 2.7%.

But that’s after an average fall of more than 4% between January 1 and December 15!

The “Barbell” May Be Back

The so-called Barbell is the name for what used to be the typical Aussie small investors’ portfolio – banks at one end, miners at the other end and a bit of cash in the middle.

Well, it might be on the way back, after a couple of years of sliding bank shares and unreliable miners.

For the first time in a decade Citi’s bank analyst, Tony Brennan has gone “Overweight” the banks. They are good value with the sector trading at a 30% discount to the broader market, ex resources, as concerns around the slowing housing cycle and Royal Commission have weighed on the sector.

He says, “We take the view that the consequences won’t be more severe than the market has already priced in. Credit is slowing but relatively gradually and business investment remains strong while owner occupier demand is offsetting weaker investor demand.

“The potential re-rating of the banks, and their high yield and modest growth, could provide a decent return, exceeding that of the broader market.”

Also from Citi: “At the same time, the resource sector, which has sold off in the correction as well, seems to also potentially offer good returns still as the commodity cycle continues in its stronger phase. Because together the bank and resource sectors account for nearly half of the market, they haven’t outperformed together often, but it has happened on occasions, including when growth stocks have corrected.”

Two Mines

There were two very different mine approvals this week: Rio Tinto’s board approved the $3.5 billion spend on the new Koodaideri iron ore mine in the Pilbara and the Indian conglomerate, Adani Group, said it was going ahead with a scaled down version of Carmichael coal mine in Queensland, self-financed.

I don’t want to dwell too much on Adani. It might not go ahead and in any case it has little direct relevance for investors.

Labor leader Bill Shorten is under a lot pressure to withhold approval for the mine: he’s going to have to make a choice between votes in Queensland (in favour of the mine) and votes in Victoria and NSW (against the mine). It will be very interesting to see which way he jumps.

Earlier this year I made a speech at the Hawthorn Town Hall with about 800 people opposing the mine, with a speech on the subject in which I said they needn’t worry because it won’t get funding. Well, I was right and wrong – it didn’t get funding, but it’s still going ahead because Adania apparently doesn’t need it.

As for whether the Carmichael mine is a good idea, it’s now going to be much smaller than the monster it was going to be although The Australian correctly pointed out yesterday that the rail line would open up a whole new coal province in Queensland, with the headline: “Coal boom looms after Adani start”.

I simply don’t have an opinion about whether building a new coal mine is a good idea or not, after all coal will still be needed for a while. But I do wonder whether Carmichael will be like Fairfax’s decision in the late 90s to build a new whiz-bang printing plant at Tullamarine at a cost of hundreds of millions of dollars. It’s now where a car dealer called Kagame keeps their spare cars.

Anyway, the Koodaideri mine in WA is entirely good and widely hailed and welcomed.

But nobody should expect it to provide a lot of jobs: it will be a “robo mine”, that is a state of the art, fully automated mine.

As it happens I had dinner the other night with the executive team at Orica, led by CEO Alberto Calderon. It was “Chatham House Rule”, so I can’t quote them, but I think I can pass on the general tone of the conversation and the broad subject matter.

It was all about technology. One after another of the Orica executives I spoke to told me that mining is now a technology business, and the final piece in the automation puzzle is what they do – which is explosives.

Everything about mining can now be automated and Australia is way ahead of the rest of the world.

Everything, that is, except for drilling holes for explosives, filling the holes with dynamite or whatever they use now, and then blowing it up. That is still manual, and dangerous, but not for long apparently.

Orica, which I think is the world’s leading supplier of explosives to mining, has been working for ten years on developing wireless blasting, and automated drilling and detonation.

Apparently it’s quite complicated because you don’t want a stray mobile phone setting it off, but Orica is already talking to customers about wireless automated blasting, and the way Rio is talking I wouldn’t be surprised if Koodaideri was one of the first in the world to use it.

Rio already has the world’s first long-distance, heavy-haul autonomous railway which both improves safety and increases capacity and has said that Koodaideri will be “a step change in both safety and productivity”.

Morgan Stanley’s leading mining analyst Glyn Lawcock has Rio as a buy with a 12-month price target of $90 (currently $73.43) and he says: “We do not see Koodaideri approval as a material catalyst for the stock; however, in our opinion it is critical to the investment case medium-term as it can sustain/ enhance Rio’s position as the lowest cost iron ore producer globally.”

After dinner I’m wondering whether Orica might be a good way to get some exposure to mining technology and resources more generally, since it seems to be on the brink of a breakthrough which could increase its market share and profit margins.

The executives I spoke to said its competitors have not been investing in technology to the extent Orica has, and that they will have a solid first mover advantage. I have no way of testing that statement in the short term, but they were adamant.

The problem is that Orica looks fairly expensive on a PE of 20 and a yield of 2.9%, and Calderon’s FY19 guidance implies some downgrades to consensus analyst forecasts, so there could be some short-term weakness in the share price.

So no hurry to buy them, but it may be a “buy the dips” situation for long-term investors.

Life On Mars

Speaking of automation. artificial intelligence and mining, here’s an interesting note from Cara MacNish on the new probe that NASA has landed on Mars.

It’s worth bearing in mind that technology used in space travel usually finds its way into common use eventually, and what the new Mars probe is doing, essentially, is mining.

Writes Cara: We’ve been talking recently about different levels of autonomy in the context of BHP’s runaway train. These range from full autonomy, relying on control systems or artificial intelligence (AI), through partial autonomy, to full remote control.

A really interesting case for autonomy arises in relation to bots on Mars, and with this week’s remarkable landing of NASA’s InSight probe, there’s no better time to take a look.

When I say remarkable, it’s worth noting that on its almost US$1 billion trip to Mars, InSight has travelled 483 million kilometres over more than 6 months at a speed of about 10,000 km/h, hit the Mars atmosphere at exactly 12 degrees to avoid burning up or bouncing off, burned through 128 km of hostile atmosphere at up to 20,000 km/h generating heats around 1,500 degrees C (sand melts at 1,414 degrees) while losing contact with Earth, and landed itself with a combination of parachutes and thrusters.

In case that sounds easy, here’s a handy list of Mars-bound robots that didn’t make it. These include the European Space Agency’s (ESA) exploding Schiaparelli Module, China’s Yinghuo-1 and Russia’s Phobos-Grunt which failed to escape the Earth’s orbit and disintegrated in the Earth’s atmosphere, the UK/ESA Beagle 2, whose whereabouts remain unknown but is presumed to have crashed on the red planet, NASA’s Deep Space 2 probes which also lost contact, and the US’ Mars Climate Orbiter which burned up in Mars’ atmosphere, to name a few. It’s no wonder NASA’s engineers at Mission Support erupted with joy (and relief) when they got the first signal from the landed probe.

For InSight, one case that requires full autonomy is the 6.5 minutes of the entry, descent and landing (EDL) sequence when the probe has no contact with Mission Control and must fend for itself. The onboard guidance software used to land the spacecraft arguably does not require AI in the commonly accepted sense (although what does constitute AI is a debate for another time). Enough is known about what to expect (the gravitational forces, atmospheric density, and so on) to program a more traditional control system. 

Where AI really comes into its own is dealing with the unknown, and perhaps the best examples of this are the mobile vehicles, or Mars rovers. Four have been successfully deployed – Sojourner (1997), Spirit (2004-2010), Opportunity (2004-?), and Curiosity (2012-). Opportunity may still be ‘alive’ but lost contact in a dust storm earlier this year. It holds the record for distance travelled by an extra-terrestrial surface vehicle at 45kms. Curiosity is alive and well, and continues to explore.

Operating a rover by remote control is effectively infeasible since it takes between 4 and 24 minutes, depending where the Earth and Mars are in their orbits, just for the radio signals to travel one way, so it can take up to an hour just to receive an image and send the next command. This is compounded by the rover’s limited data rate, power and thermal limitations, and the time Earth is in its (or its orbiters’) field of view. This makes the use of AI for autonomously navigating and mapping the rover’s terrain attractive, if not essential.

But the opportunities for exploration are far greater. Not only do we need the rover to avoid hazards while driving itself, we don’t want it to miss items of interest. This involves both training it to spot items that it learns are important, and identifying items that are out of the ordinary.

A good example is one of Opportunity’s most significant, but almost missed, discoveries – the Block Island meteorite, the largest that had been found and at the time thought to demonstrate that Mars once had a denser atmosphere. The rover had passed the meteorite when a scientist spotted something on one of its low resolution thumbnail images. A decision was then made to backtrack and investigate, a diversion that took several days. 

A basic autonomous exploration system (AEGIS) has since been uploaded to both Opportunity and Curiosity. A range of more sophisticated AI systems, primarily vision, object recognition and navigation systems, are in the pipeline, and some should be ready for the next rovers planned for launch in 2020. Hopefully this will ensure that our artificial life forms won’t miss any real lifeforms should they happen to pass by!

Research and Diversions


Here is where you can download a free copy of Ray Dalio’s book “Principles for Navigating Big Debt Crises”.

And here is a good review and discussion of it by John Mauldin.

A deal between Trump and Xi will not last. “…military tensions make the US-China trade dispute much harder to settle than the Trump administration’s trade arguments with Mexico and Canada, neither of which are strategic rivals to the US.”

Dallas Fed: global economy continues to grow amid downside risks.

The founder of a chain of sandwich explains the forces that led to Trump. It’s quite good: “Trump is a human hand grenade to blow up a society that isn’t working for big swatches of America.”

This is amazing: a 10-minute apology on YouTube by a hedge fund manager, James Cordier of It feels like he’s going to burst into tears at any moment – and he does! Then you think: my god, he’s going to pull out a gun and shoot himself! “This rogue wave that I was unable to navigate (the oil market volatility in November) has likely cost me my hedge fund … I am so sorry that I was unable to manage the rogue wave that hit us this week.”

Pieter Fourie, head of global equities for the South African wealth manager, Sanlam, interview by John Abernethy of Clime Investment Management. Really interesting stuff.

A really good piece on the Mueller inquiry: “Complex charges against nearly three dozen people [and] organizations in less than two years is unheard of. Federal investigations may go on for three or four years before charges are brought against a few defendants. Also despite nearly daily false attacks from the president and his allies, the entire team has just kept its head down and done their work.”

“Because they happen so frequently, it’s almost impossible to keep track of all the massive and consequential (court) rulings against this president and his administration that are logged every week and rarely viewed in the aggregate. But let’s try…”

The Julian Assange case is really about the freedom of the press.

The oil market is controlled by three men: Trump, Putin, and Mohammed bin Salman.

Koukoulas: “A total $400bn has been wiped off the value of Australian house prices since the 2017 peak, yet the RBA projects an indifferent and daresay bold outlook for the current economy. Its outlook faces extreme downsides.”

The end of the beginning: “Close to three-quarters of all the adults on earth now have a smartphone, and most of the rest will get one in the next few years. However, the use of this connectivity is still only just beginning. Ecommerce is still only a small fraction of retail spending, and many other areas that will be transformed by software and the internet in the next decade or two have barely been touched. Global retail is perhaps $25 trillion dollars, after all.”

Why We Sold Apple Stock: “Our firm bought Apple shares for clients’ portfolios in 2013, and we are used to being a contrarian voice when it comes to the stock (read here and here) — we loved it when it was hated. Now we are contrarian again — this time going against the company’s faithful.”

Negotiations have been a rude awakening for Brexit supporters.

President Bloomberg? Although Michael Bloomberg hasn’t made any announcements yet about his 2020 candidacy, he has taken a number of meaningful steps in its direction—steps that make it clear he’s serious this time and is not overthinking as he did in 2016. 

How the experts are damaging democracy – trust me, I’m a doctor.

Google and the media: the difficult path towards co-operation.

From the (Vanity Fair) archive – Feb 2016: Is this the end of Europe? Interesting to read this now. “Europe is beset by so many crises that it can be hard to remember them all. In rough order of prominence, they are: homegrown terrorism, the largest migration of people since World War II, sovereign debt, doubts about the euro’s viability, the rise of extreme right-wing parties such as France’s National Front, Russia’s menace to its western neighbors, growing Euro-skepticism (especially in Britain, which may easily vote to leave the European Union in a forthcoming referendum), the election of hard-line governments in Central and Eastern Europe, and the Catalan independence movement.” 

Superannuation early release rules to be relaxed.

A good explainer on how frequent flyer programmes work.

An excellent Q&A session with Nicholas Gruen, who is a very good economist, who is entertaining company as well.

The Trump Administration’s new report on climate change warns that harm to communities and the economy is inevitable, with costs threatening to reach hundreds of billions of dollars annually by the middle of this century.

Trump’s response to it: “I don’t believe it.”

Why does the yield curve slope predict recessions? (From the Chicago Fed).

Britain risks suffering an even bigger hit to its economy than during the global financial crisis 10 years ago if it leaves the European Union in a worst-case Brexit scenario in four months’ time, the Bank of England said on Wednesday.

Review of Alan Rusbridger’s Breaking News, about the shift from old to new media, and its impact on journalism. “It is too soon to write legacy media off, or to assume newly familiar giants won’t one-day fall victim to the same dynamism that allowed Facebook to go from nothing to world-smothering leviathan in a decade.”

An oldie, but a goodie – and relevant lately:


Roger Waters reflect on his trip through Latin America.

The history of the world’s oceans is locked in whale earwax: “The massive plugs contain spikes and dips of stress hormones that perfectly match the history of modern whaling.”

Why look at art when you could watch TV? On John Berger’s revolutionary art criticism.

Airlines in the UK used “an algorithm” to split up people travelling together so that they pay extra to be together. This is not a conscious algorithm own decision, but a human one. Made by the execs who asked for it, and the developers who implemented it.

The 10 best books about food of 2018.

How to manage your time. Think of it like physical space. Cluster similar tasks. Give your loved ones regular fifteen-minute periods of undivided attention. Learn how to say no. “If you don’t know what you are supposed to be doing, it is hard to refuse things. And if you have never known what you are supposed to be doing, you won’t even have the vocabulary. Say: ‘I’d love to do it, but my time is accounted for right now’.

Chess, AI and the future of Asia: Global chess enthusiasts sat enthralled this week during the sport’s latest World Championships head. Yet while this long-anticipated contest was fought out between an American and a European, rapid developments in modern chess hold intriguing lessons — technologically, geographically and institutionally — for the future of Asia too.

On China’s troubled relationship with Islam, dating back 1,300 years. 

“Half of all Americans believe demonic possession is real. The percentage who believe in the devil is even higher, and has been growing: Gallup polls show that the number rose from 55 percent in 1990 to 70 percent in 2007. 

Nothing is moving in the foundations of physics. One experiment after the other is returning null results: No new particles, no new dimensions, no new symmetries. The current theories are incomplete. We know this because dark matter is merely a placeholder for something we don’t understand, and because the mathematical formulation of particle physics is incompatible with the math we use for gravity. Physicists knew about these two problems already in 1930s. And until the 1970s, they made great progress. But since then, theory development in the foundations of physics has stalled.”

Would you believe Gilbert O’Sullivan is still around? He turns 72 today. He only did one good song (I think), and it’s pretty grim, about loneliness, unhappiness and suicide, all sung with a happy lilt. Alone Again (Naturally). Weird.

On a happier note, it’s Bette Midler’s birthday today as well. She’s a year older than Gilbert – 73. And no, I’m not playing The Wind Beneath My Wings, because it’s corny. Here’s Bette doing a nice cover of the Rolling Stones’ “Under The Boardwalk“.

And Thursday was Gaetano Donizetti’s birthday, in 1797. Here is Joan Sutherland and Luciano Pavarotti doing the duet from Lucia di Lammermoor. Holy cow – those two!

And here is the great scene from The Fifth Element movie, in which Albanian soprano Inva Mula, sings “Il dolce suono”, the mad scene of Act III, Scene 2 from Lucia di Lammermoor, although it was mimed by French actress, Maïwenn Le Besco. What a voice!

“The turkey you pardoned published a scorched-earth tell-all about its time in the White House.”


Facebook Live

If you missed #AskAlan on our Facebook group this week (or if you don’t have access to Facebook) you can catch up here. And we’ve just given the Facebook Livestream its own page where you can also opt to just listen to the questions and answers.

If you’re not on Facebook and would like to #AskAlan a question, please email it to then keep an eye out for the Facebook Live video in next week’s Overview.

Next Week

By Craig James, Chief Economist, CommSec

Australia: Summer tsunami

·         A strange quirk of the statistical calendar is that each change of seasons in Australia is ushered in by a bevy of economic events. And so the ‘Summer Tsunami’, with more than a dozen indicators or events scheduled in the next fortnight.

·         The week kicks off on Monday when the Australian Bureau of Statistics (ABS) releases the Business Indicators publication for the September quarter. The data on inventories or stocks is a direct input to Wednesday’s economic growth figures.

·         The ABS also publishes the building approvals data on Monday – a key leading indicator for home building.

·         Also on Monday, both the AiGroup and CommBank release separate survey results on manufacturing activity.

·         And CoreLogic publishes the November results for home prices also on Monday. Home prices may have fallen by 0.8 per cent in November with weakness concentrated in Sydney and Melbourne.

·         On Tuesday, the regular weekly reading on consumer confidence is published by ANZ and Roy Morgan. And the ABS publishes quarterly data on government spending and the Balance of Payments – the broader data on the trade position.

·         The Reserve Bank Board meets on Tuesday but no rate change is expected.

·         On Wednesday the ABS releases the National Accounts – containing the key reading of economic growth in the September quarter. The current annual growth rate of 3.4 per cent is well above the 2.75 per cent long-term average.

·         Also on Wednesday the Federal Chamber of Automotive Industries issues the November new vehicle sales figures. And both AiGroup and CommBank publish their respective purchasing manager survey results for the services sector.

·         On Thursday, the ABS releases the International trade data (data on exports and imports) for October. Retail trade data is also issued while Reserve Bank Deputy Governor Debelle delivers a speech.

Overseas: US jobs data in focus. But also the US-China trade war and OPEC meeting

·         Ordinarily the US jobs data would hog the limelight in the first week of December. But financial markets will respond to the US-China trade discussions (November 30-December 1), testimony of the US Federal Reserve chair on Wednesday and the OPEC oil ministers meeting on Thursday.

·         The data week kicks off on Monday in the US when the Institute of Supply Management (ISM) issues the manufacturing purchasing managers survey. An equivalent survey is released in China by the private sector, Caixin media group.

·         Also in the US on Monday, data on construction spending is released with new vehicle sales data. A modest 0.4 per cent lift in construction spending is tipped for October. And vehicle sales were at an 11-month high in October at a 17.57 million annual rate. Investors will be interested as to whether the upward sales trend continued into November.

·         The usual weekly data on US chain store sales is released on Tuesday along with the ISM New York index and IBD/TIPP economic optimism gauge.

·         On Wednesday in the US, the Federal Reserve chair, Jerome Powell, will give testimony of the economic outlook before the congressional Joint Economic Committee. Expect more focus on ‘neutral’ interest rates.

·         Also on Wednesday, the ISM issues the services sector purchasing manager’s survey. Little change is expected on the current index of 60.3 – well above the 50 reading that separates expansion from contraction.

·         The regular weekly data on mortgage applications is released also on Wednesday with the ADP employment survey, productivity & labor cost data and the Federal Reserve Beige Book.

·         The ADP survey is expected to show that 189,000 private sector jobs were created in November. The Beige Book is a summary of conditions in Federal Reserve districts and is an important signpost ahead of the expected rate hike to be delivered on December 19.

·         On Thursday in the US, the October data on international trade is issued together with the weekly data on new claims for unemployment insurance, factory orders and the Challenger survey of job cuts.

·         Economists expect little improvement in the trade deficit for October, with a deficit near US$54 billion. Interestingly, the Chinese trade data is scheduled to be released on Saturday (December 8). Inflation data follows on Sunday December 9.

·         On Friday, the non-farm payrolls (employment) data is issued with the jobless rate, hours worked and average earnings data. A 205,000 lift in jobs is expected.

·         Also on Friday in the US, the preliminary December reading of consumer sentiment is issued with consumer credit and wholesale inventories figures.

Last Week

By Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital.

Investment markets and key developments over the past week

  • US, European and Japanese share markets rose solidly over the last week on increasing signs from the Fed that it is open to pausing or slowing its interest rate increases. Chinese shares rose slightly but Australian shares fell slightly. Weakness in resources, consumer, utility and real estate shares weighed heavily on the Australian share market over the last week offsetting gains in financials and industrials. Reflecting a more dovish Fed and generally low inflation readings bond yields mostly fell. Commodity prices were mixed with metals and oil up a bit, but iron ore down. The $A rose as the $US fell slightly.
  • Two weeks ago, I noted three potential positives for shares: a Fed pause, the oil price crash extending the cycle and some hope on the trade front. We are still waiting for something on trade, oil prices have since fallen even further providing a boost to consumers and comments over the last week from Fed Chair Powell and Vice-Chair Clarida along with the minutes from the last Fed meeting have added confidence to the prospect of a pause in rate hikes next year. The key message from the Fed is that it remains upbeat on the US economy – consistent with another hike in December, but that rates are now “just below…neutral” and it needs to be aware of potential headwinds to growth including the lagged response in the economy to past monetary tightening and that there are no major excesses to deal with, which is all consistent with the Fed being open to a pause and slower pace of rate hikes next year. Following a hike in December the Fed is likely to lower its “dot plot” of rate hikes for 2019 and replace the reference to “further gradual [rate] increases” in its post meeting statement with a reference to being more data dependent. A pause on rates in the first half of next year is now highly likely particularly if core inflation continues to remain benign. A slower more cautious Fed would be positive for markets as it would reduce fears of a US downturn and take pressure of the $US which would provide some relief for emerging markets and commodity prices.
  • Waiting on Saturday night’s meeting between Presidents Trump and Xi. In the last week it appears that expectations of a break through on the trade dispute between the US and China have diminished particularly after Trump repeated his threat of additional tariffs on China and then sounded hot and cold on whether there would be a deal or no – although this looks a lot like pre-meeting negotiating tactics. There are several ways this meeting could go:
  • 1/ it could end with no agreement and maybe even more hostility with the US remaining on track to raise the already imposed tariffs to 25% from 10% currently in January 1 and to put tariffs on the remaining circa $US267 of imports from China;
  • 2/ Trump and Xi could provide a framework for future talks between their negotiators to resolve their differences. This may or may not be accompanied by the US committing to a ceasefire on further tariff hikes while talks proceed – although it’s hard to see how China will negotiate without one; or
  • 3/ China could kick of negotiations offering a broad-based reduction in its tariffs. China’s average tariff rate last year was 9.8% and the US’ was 3.4%. While China is allowed a higher tariff rate under WTO rules as a developing country getting it down has been a key demand of Trump and China has been moving in this direction anyway and has been reportedly thinking about doing more.
  • I have a leaning towards some sort of positive outcome from the Trump/Xi meeting – as both sides want a deal, but it’s a close call. Either way I remain of view that Trump will want to resolve this issue sometime in the next six months before the tax/tariff hikes wipe out all of the remaining fiscal stimulus next year and start to act as a drag on US economic growth pushing up prices at Walmart and pushing up unemployment threatening his re-election in 2020.
  • Stronger Australian budget position likely to see the Government announce tax cuts ahead of next year’s Federal election. PM Morrison’s announcement that next year’s budget will be brought forward to April 2 is clearly designed to clear the way for an election in May (on either May 11 or May 18). Meanwhile, the Mid-Year Economic and Fiscal Outlook report to be delivered on December 17 is likely to show that Federal budget is running around $9bn per annum better than expected – thanks to higher than expected commodity prices and employment driving stronger tax revenue only partly offset by fiscal easing measures. This suggests this year’s budget deficit projection is likely to fall to around -$6bn (from a projection of -$14.5bn in the May Budget) and the 2019-20 surplus on unchanged policies will be projected to be around +$11bn (up from $2.2bn in May) with future surpluses looking even stronger. This is likely to enable the Government to announce $9bn in income tax cuts and other pre-election goodies starting in July 2019 and still maintain a surplus projection for 2019-20. The big risk of course is that the revenue windfall is not sustained as slower Chinese growth weighs on commodity prices, jobs growth slows and wages growth remains weak. The upside of bigger and earlier income tax cuts is that it will inject a bit of spending power into household budgets providing a partial offset to what looks like being an intensifying negative wealth effect from falling house prices on consumer spending next year. So, while we see pretty constrained consumer spending growth next year its not all doom and gloom.

Major global economic events and implications

  • US data releases over the last week were mixed. On the weak side home prices rose only slightly in September, home sales fell in October, the goods trade deficit deteriorated again in October and jobless claims rose again (although they remain very low). But against this, growth in consumer spending and income was solid in October, consumer confidence fell slight in November but remains around an 18-year high and Black Friday retail sales look to have been strong. Meanwhile, core inflation fell back to 1.8% year on year in October suggesting inflation may have peaked and providing plenty of scope for a Fed rate pause at some point next year.
  • Eurozone sentiment slipped for the 11th month in a row and bank lending slowed all of which will keep the ECB cautious.
  • Japanese jobs data slowed a bit in October but remains strong, industrial production rebounded after weather disruptions and core inflation measures in Tokyo tracked sideways at a low level. Ultra-easy Bank of Japan monetary policy will continue.
  • Chinese official PMIs softened further in November and momentum in industrial profits continued to slow in October which is all consistent with a further gradual slowing in growth and points to a more vigorous ramp up in policy stimulus.

Australian economic events and implications

  • Australia data released over the last week was messy with a sharp fall in September quarter construction activity that was broad based across residential and non-residential building and engineering activity, a fall in September quarter private new capital expenditure and continuing softness in credit growth. There was good news though in that business investment plans for the current financial year continue to improve with capital spending plans compared to a year ago growing at their fastest in six years as the slump in mining investment slows but non-mining investment improves. So, business investment should help provide an offset to the downturn in the housing cycle. 

Source: ABS, AMP Capital

  • Credit growth remained soft in October with credit to property investors growing at its slowest on record and owner occupier credit continuing to slow. Fortunately, business credit growth has picked up possibly reflective of stronger investment.

Source: RBA, AMP Capital

What to watch over the next week?

  • Reaction to the outcome of the meeting between President Trump and Xi Jinping at the G20 summit will be a key driver of markets in the week ahead.
  • In the US, jobs data to be released Friday will be the focus. Expect to see another solid gain in payrolls of around 200,000, unemployment remaining at 3.7% and wages growth rising to around 3.2% year on year. In other data expect the November ISM manufacturing conditions index (Monday) to edge down to a still strong 57.5, the non-manufacturing conditions ISM index (Wednesday) to edge down to 59.5 and the trade deficit (Thursday) to widen slightly, Another speech by Fed Chair Powell (Wednesday) will likely reinforce the impression that its becoming open to a pause in rate hikes next year and the Fed’s Beige Book of anecdotal comments will be released the same day.
  • There is also another bout of shutdown risk in the US in the week ahead with the need for another “continuing government funding resolution” to avoid another US government shutdown from December 7 – this could create a bit of noise given Trump’s past threats to shut down the government if he doesn’t get funding for his wall – but ultimately an extended shutdown in the run up to Christmas is in neither sides interest. And a lot of spending measures have already been approved so the scale of any shutdown will be small with little economic impact.
  • China’s Caixin manufacturing conditions index (Monday) will likely remain soft.
  • OPEC’s meeting on Thursday is likely to agree to production cuts designed to end the rout in oil prices since early October.
  • In Australia the RBA will leave rates on hold for the 26th meeting in a row. The RBA remains between a rock and a hard place on rates. Strong infrastructure spending, improving non-mining investment, a lessening drag from falling mining investment, strong export earnings and a fall in unemployment to 5% are all good news. But against this the housing cycle has turned down, this will act as a drag on housing construction and consumer spending via a negative wealth effect, credit conditions are tightening, wages growth remains weak, inflation is below target and share market volatility is highlighting risks to the global outlook which is a potential threat to confidence and export earnings. So yet again the RBA will remain on hold. We remain of the view that rates will be on hold out to second half 2020 at least with a rising risk that the next move will be a cut before a hike.
  • On the data front expect a continuing slide in home prices for November and a 1% decline in building approvals for October (both due Monday), trade data (Tuesday) to show a 0.2 percent contribution from net exports to September quarter GDP growth, September quarter GDP growth (Wednesday) to come in at 0.6% quarter on quarter or 3.3% year on year helped by solid net exports and public demand but soft consumer spending and dwelling investment and weak business investment, October retail sales to rise by 0.3% and the trade surplus to fall back to $2.9bn (both due Thursday).

Outlook for markets

  • Shares remain at risk of further short-term weakness, but we continue to see the trend in shares remaining up as global growth remains solid helping drive good earnings growth and monetary policy remains easy.
  • Low yields are likely to drive low returns from bonds, with Australian bonds outperforming global bonds as the RBA holds and the Fed continues to hike (albeit at a slower rate next year).
  • Unlisted commercial property and infrastructure are still likely to benefit from the search for yield, but it is waning.
  • National capital city residential property prices are expected to slow further with Sydney and Melbourne property prices likely to fall another 15% or so, but Perth and Darwin property prices at or close to bottoming, and Hobart, Adelaide, Canberra and Brisbane seeing moderate gains.
  • Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.2%.
  • Having fallen close to our target of $US0.70 the Australian dollar is at risk of a further short-term bounce as excessive short positions are unwound and the Fed moves towards a pause on rate hikes. However, beyond a near term bounce the $A likely still has more downside into the $US0.60s as the gap between the RBA’s cash rate and the US Fed Funds rate will likely push further into negative territory. Being short the $A remains a good hedge against things going wrong globally.