Last Night’s Markets
The Arrest of Meng Wanzhou
Hayne: The End of the Beginning
Saxo’s 10 Outrageous Predictions for 2019
The Great Australian Property Bust
Research and Diversions
US payrolls for November came in under expectations at 155,000 (consensus was 190,000). Also, hours worked slipped from 34.5 per week to a 14-month low of 34.4, which was the equivalent of 370,000 people being laid off. Average weekly income also dipped 0.1%.
In short, it was a weak jobs report – not bad enough to get the tom-toms going about recession, but enough get rate hike expectations down a bit: the odds of a December hike came in from 86% to 76%, and some forecasters started talking about March coming off the table altogether.
Normally that would have had the stock market going for a run – the old bad-news-is-good-news thing – but not last night.
Traders have Meng Wanzhou on their minds, and the extent to which her arrest has raised the stakes in the trade dispute between Washington and Beijing. No one really knows, but it’s all a bit worrying so Wall Street sold off close to 2 per cent (see more on this below).
The other thing weighing on the market has been the weak oil price leading to concerns about global growth, but last night oil surged about 5% after OPEC agreed to cut production by 1.2 million barrels a day, thumbing its nose at Trump’s demand they keep the price low.
This week’s market bumpiness had two parents: a partial inversion of the US yield curve and the arrest in Canada, at America’s behest, of the crown princess of China’s Huawei.
Both were momentous events. The second of them could contain echoes of the assassination of Archduke Franz Ferdinand on June 28, 1914 … time will tell, and I’ll discuss that in more detail below.
But first, The Inversion.
This week the 5-year rate dipped below the 2 and 3-year rates, which spooked the equity market and caused that 3% dump on Wall Street on Tuesday.
When the yield curve goes upside down it is seen as an indicator of a forthcoming recession. All recessions are preceded by a yield curve inversion, but not all inversions lead to a recession (just almost all).
The market mostly watches that 2yr/10yr curve in the graph, which is still positive as we speak, although it has come in sharply and went below 10 basis points during the week, and as the chart above shows, is expected to invert in July next year.
Jim Bianco of Bianco Research told Grant’s Interest Rate Observer this week that, going back to 1970, each time the 2-yr versus 5-yr curve has inverted, the 3-month vs 10-year differential (which Bianco dubs “the economist curve” due to its frequent use in academic studies) soon followed suit, concluding: “It may take a while, but once one curve inverts, they eventually all invert.”
What’s driving the inversion? Aggressive Fed tightening combined with an uncertain inflation and growth outlook.
Bianco explains: “Assuming inflation actually returns, all is well. The Fed is correctly leaning against the markets. However, this is not always the case. . . By our count, the Fed has engaged in nine rate hike campaigns. Since 1980, inflation has been in a downtrend. PCE (inflation) has rarely exceeded 2% since 1997. Each time it has, the Fed aggressively hikes, the curve inverts and a recession ensues about a year later.”
Interest rate futures currently assign a 70% probability of a rate hike at the December meeting, and 0% chance of a rate cut out to December 2019, which is why the short end is moving higher while the long end of the interest rate structures stays where it is.
Dave Rosenberg of Gluskin Sheff says that what matters is the direction of the yield curve, because the movement in its shape commands a 70% correlation to year-on-year GDP growth with a lead time of five quarters.
“That is all you need to know,” he says. Five quarters ago, the 2s/10s Treasury curve was positively sloped to the tune of over 80 basis points and that spread has since narrowed to a mere 11bps. Whether or not the yield inverts, its pattern of flattening bakes in the cake of a meaningful economic slowdown in 2019.
“There seems little chance that the +9% eps growth view comes to fruition, especially since this will likely be double any reasonable view of where the trend in nominal GDP will likely line up. The odds of further margin expansion to justify current valuations (even after this latest corrective phase in the stock market) seem remote, at best.”
And by the way, given the futures market odds noted above, the Fed is in a very delicate spot – a lose-lose situation.
If they shift their rhetoric towards being less aggressive and more “dovish”, the market will take this as increasing the probability of a recession. If they stay “hawkish”, the yield curve will decisively invert which will be seen as increasing the probability of recession. Either way, the stock market is in for a rough time.
It’s worth remembering that before the GFC, the Fed funds rate was 5%, its balance sheet was negligible and public debt to GDP was 64%. Now the Fed funds rate is 2-2.25%, the balance sheet is US$4.5 trillion and public debt is US$21.8 trillion, or 108% of GDP.
In other words there is much less capacity to deal with any economic shock, or even a downturn, than there was 11 years ago.
Will there be a US recession? Well, that is the question, and there is a debate going on about that (as there always is).
For example, Morgan Stanley published a big 2019 Outlook report this week containing this chart:
Morgan Stanley is now predicting a big slowdown, but not a recession, while consensus is for a mild slowdown next year from 2.5% to 2% growth.
Recessions are caused by “events, dear boy, events”, as Harold Macmillan is supposed to have said about politics. The events that could cause one in the US next year are the Fed being too aggressive and a serious trade war with China.
Which brings us to …
Two headlines currently sit side by side on the People’s Daily homepage: “China confident about trade talks with US” and “China demands immediate release of Huawei CFO”. They are likely to be mutually exclusive.
Another Chinese publication, Global Times, even got out its thesaurus and called the arrest “despicable hooliganism”.
But the most amazing thing is that the daughter of Huawei’s founder, Ren Zhengfei, was arrested in Canada on Saturday, before Presidents Trump and Xi sat down to dinner to try to resolve the trade war, but Trump didn’t know about it, while Xi did, and decided not to say anything.
That fact is telling in itself: Xi knows what’s going on, Trump doesn’t.
That’s especially surprising given that it’s a foreign policy situation – apparently, Huawei is breaching the Iran sanctions – rather than protecting the public from terrorism, or even robbery, which normally justifies the Justice Department not telling the White House when it’s arresting someone important.
Anyway, it seems to me the markets are right to worry that Meng Wanzhou’s arrest jeopardises the efforts to resolve the trade war, not that there was ever much hope of easily resolving them. As I have written here a few times, it’s not just about trade, but about an attempt to contain China’s rise to world technology domination.
Trump has people at the White House in his ear about the need to do something about China, and he is only too happy to use tariffs to do it. As he wrote on Twitter during the week: “…I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power. We are right now taking in $billions in Tariffs. MAKE AMERICA RICH AGAIN.”
The problem, of course, is that the exporting country doesn’t pay the tariff – American consumers do.
But the tariffs are not aimed at making China “pay” to “raid” America, but at forcing US companies to shift their supply chains elsewhere to preserve their profits.
In that context, Huawei looms large, and has become the key corporate focus of the anti-China forces in the US and its allies, including Australia.
I obviously have no idea whether Huawei is using its communications technology to help China spy on us, but clearly ASIO and the CIA think so and are persuading the politicians and their advisers and bureaucrats about it. Separately, the company appears to be ignoring sanctions against both Iran and North Korea, which is the reason for Meng Wanzhou’s arrest.
But the main problem with Huawei is its dominance of 5G technology. US, Canada, New Zealand, Australia, Great Britain, whose intelligence agencies share information on a large scale, have all either banned or restricted Huawei’s 5G technology and the politicians etc are happy to support that as a sort of industry protection measure – to boost local production (in the US at least – we don’t make the stuff here, apart from Netcomm Wireless).
Huawei is represented in Australia by John Brumby, former Victorian Premier, national president of the Australia China Business Council, and incoming Chancellor of LaTrobe University, and no small banana, but so far he’s not cutting much ice with ASIO and the Government.
The arrest of Ren Zhengfei’s daughter takes the whole thing with Huawei to a new level, and takes the tension between the US and China to a new level as well.
Maybe Trump will just ride in and overrule the Justice Department, but that is hard to imagine. The situation has not yet found its way into the Presidential Twitter feed, but that’s probably the thing to keep an eye on. I’ll do it so you don’t have to.
Or the beginning of the end? The banking royal commission has ended its public work and Kenneth Hayne and his staff are writing their final report, due at the beginning of February.
What follows is a speculation about what it might conclude and recommend – will it suggest incremental changes to regulation and remuneration practices, or a radical restructuring of the industry, including, but not limited to, breaking up the banks.
Before going on, it’s worth noting that this has actually been an examination of the core part of most Australians’ investment portfolios, not just an important bunch of utilities. The big four banks might have fallen 15% in two years, but they still represent 21% of the ASX200 market cap, and a much larger proportion than that of most individual retirees’ portfolios.
So this year’s disclosures in the royal commission, and the forthcoming final conclusions of Commissioner Hayne, are of great importance to investors.
That’s especially since the final report will come out in the heat of an election campaign and both major parties are likely to promise to implement everything he suggests, no matter what.
As the likely Treasurer after May 18, Chris Bowen, said: “A Government of either persuasion will implement the Royal Commission recommendations.”
But judging by the direction of questioning in the hearings and the content of the interim report, I think the final report will focus on three things:
- Separating banking from wealth management;
- Responsible lending.
All the banks bar Westpac are divesting themselves of wealth management so that recommendation will only affect one of them, and it will be good for Westpac anyway. I don’t know why CEO Brian Hartzer and his board are determined to hang onto BT – maybe they think it will give them an advantage over the others after they have gotten rid of MLC, Colonial, and ING.
But I suspect it won’t matter: some form of Glass-Steagall – the US law that separated banking from insurance and investment banking between 1933 and 1999 – will be introduced into Australia, especially if Labor wins the election, and it will only make the banks more profitable in my view
On remuneration, it’s pretty clear that Hayne will recommend that the banks give smaller bonuses and more fixed salary, and that the amount they do have “at risk” is weighted more towards compliance, conduct and customer satisfaction than sales targets.
It’s questionable whether such a thing can be enforced, either by law or APRA breathing down their necks, but we’ll see.
In any case, I suspect that the banks are already heading in that direction anyway, because it’s pretty clear that is the community expectation.
Responsible lending, on the other hand, is a much bigger deal.
It was pretty clear that Ken Hayne and his staff couldn’t believe their ears when they learned that individual bank lending decisions are based on the Household Expenditure Measure (HEM), a general statistical method of estimating peoples’ expenses, rather than the actual spending of families and individuals as revealed by bank statements and/or receipts.
The relatively new “responsible lending” provisions of the National Consumer Credit Protection Act put the onus on the banks to not lend to people who can’t afford the repayments.
It was clear from the evidence to the royal commission, and to simple common sense, that the use of HEM is inconsistent with those provisions, therefore the commission is likely to recommend that banks start using actual expenses data rather than HEM.
I think there’s a fair chance he will simply recommend that use of the HEM should be banned.
If so, that will be a bigger deal than it sounds. It is likely to make the current credit squeeze even squeezier; credit will virtually dry up, not because everybody has been fibbing and can’t get a loan when the truth about spending habits is revealed, but because banks haven’t been asking, or checking properly when they do.
It will take a while for bank credit department mindsets to be reset, and while that’s happening, it could cause a recession, not to mention a fall in bank revenue and share prices.
In a way, it would be better if the final report went for the radical breakup option rather than recommending that responsible lending provisions in legislation are tightened.
Not that I think banks should not lend responsibly, but that this is not the time to be further restricting lending.
The Danish bank has been publishing these “outrageous predictions” for ten years, and they’re always really interesting and worth a read. They’re not meant to be taken literally, although maybe some will come to pass, they’re mainly just to get us thinking.
Number 6 should really be number 1 for us, but more on that subject below.
1. EU announces a debt jubilee
By which Saxo means debt monetisation. “In 2019, the unsustainable level of public debt, a populist revolt, rising interest rates from European Central Bank tapering/lower liquidity, and sluggish growth reopened the European debate on how to get ahead of a new crisis. …when contagion spreads to France, policymakers understand that the EU faces the abyss. Germany and the rest of core Europe, which refuses to let the Eurozone fall apart, have no other choice than to back monetisation.”
2. Apple “secures funding” for Tesla at $520/share
“Apple realises that if it wants to deepen its reach into the lives of its user base, the next frontier is the automobile as cars become more digitally connected. After all, the late Steve Jobs showed that a company needs to bet big and bet wild to avoid complacency and irrelevance.”
3. Trump tells Powell “you’re fired”
At the December 2018 Federal Open Market Committee meeting, Federal Reserve chair Jerome Powell signs on with a slim majority of voters in favour of a rate hike – one too many and the US economy and US equities promptly drop off a cliff in Q1 2019. By the summer, with equities in a deep funk and the US yield curve having moved to outright inversion, an incensed President Trump fires Powell and appoints Minnesota Fed President Neel Kashkari in his stead.
4. Prime Minister Corbyn sends GBPUSD to parity
“Labour sweeps to a resounding victory and names Jeremy Corbyn as prime minister on the promise of comprehensive progressive reform and a second referendum on a “to-be defined” Brexit deal. Inflation rises steeply, business investment languishes, and non-domiciled foreign residents run for cover, taking their vast wealth with them. Sterling is crushed on the double trouble of ugly twin deficits and lack of business investment on the still-unresolved Brexit issue.
5. Corporate credit crunch pushes Netflix into GE’s vortex
2019 proves the year of credit dominos toppling in the US corporate bond market. It starts with General Electric losing further credibility in credit markets … (and) the carnage even spreads as far as Netflix where investors suddenly fret the firm’s fearsome leverage, with a net debt to EBIDTA after CAPEX ratio of 3.4 and over $10bn in debt on the balance sheet. Netflix’s funding costs double, slamming the brakes on content growth and gutting the share price.
6. Australian central bank launches QE on housing bust Down Under
“In 2019, the curtains close on Australia’s property binge in a catastrophic shutdown driven most prominently by plummeting credit growth. In the aftermath of the Royal Commission, all that is left of the banks is a frozen lending business and an overleveraged, overvalued mortgage-backed property ledger and banks are forced to further tighten the screws on lending. Australia falls into recession for the first time in 27 years as the plunge in property prices destroys household wealth and consumer spending. The bust also contributes to a sharp decline in residential investment. GDP tumbles. The blowout in bad debt squeezes margins and craters profits. The banks’ exposure is too great for them to cover independently and bailout would be required from the RBA, perhaps recapitalising and securitising mortgages onto the RBA’s balance sheet.
7. Germany enters recession
A global leader for decades, Germany is struggling to upgrade its leveraging of modern technology. The crown jewel of the German economy, representing a cool 14% of GDP, is its car industry. By 2040, 55% of all new global car sales and 33% of the stock will be EVs. But Germany is only just starting the transformation to EV and is years behind, and stiffer US tariffs won’t make things any better for German supply chains or exports. 2019 will be the peak of anti-globalisation sentiment and will create a laser-like focus on costs, domestic markets and production, and the further use of big data and reduced pollution footprint – the exact opposite of the trends that have benefitted Germany since the 1980s.
8. X-Class solar flare creates chaos and inflicts $2 trillion of damage
“All life on earth exists thanks to the stable bounty of energy hurled our way by the sun, but Sol is not always a serene and beneficent ball of burning hydrogen. As solar astronomers are well aware, the sun is also a seething cauldron of activity capable of producing incredible violence in the form of solar flares, the worst of which see the sun vomiting actual matter and radiation in the form of Coronal Mass Ejections, or CMEs. In 2019, as solar cycle 25 kicks into gear, the earth isn’t so lucky and a solar storm strikes the Western hemisphere, taking down most satellites on the wrong side of the earth at the time and unleashing untold chaos on GPS-reliant air and surface travel/logistics and electric power infrastructure. The bill? Around $2 trillion, which is actually some 20% less than the worst-case scenario estimated by a Lloyds-sponsored study on the potential financial risks from solar storms back in 2013.
9. Global Transportation Tax (GTT) enacted as climate panic spreads
The new GTT pushes up air travel ticket prices and maritime freight, increasing the general price level as the new tax is passed on to consumers. The US and China have previously contested fuel taxes on aviation, citing the 1944 Chicago Convention on International Civil Aviation, but China changes its stance as a natural progression of its fight against pollution. This forces the US to reluctantly join forces in a global transportation tax on aviation and shipping. Stocks in the tourism, airline, and shipping industries plunge on increased uncertainty and lower growth.
10. IMF and World Bank announce intent to stop measuring GDP, focus instead on productivity
In a surprising move at the International Monetary Fund and World Bank spring meetings, chief economists Pinelopi Goldberg and Gita Gopinath announce their intent to stop measuring GDP. They argue that GDP has failed to capture the real impact of low-cost, technology-based services and has been unable to account for environmental issues, as attested by the gruesome effects from pollution on human health and the environment in India and elsewhere around the world.
So will Saxo’s Outrageous Prediction No.6 come to pass, or even something close to that?
Well, on Thursday night, at the annual Australian Business Economists’ dinner, RBA deputy governor, Guy Debelle, seem to be suggesting it might.
I wasn’t there, and it’s not in his prepared speech about the lessons of the GFC, but reports of the Q&A session afterwards were quite interesting.
Adam Creighton, in The Australian, quotes Debelle as follows:
“It is the level of interest rates that matters and they can still move lower.”
“Quantitative easing is a policy option in Australia, should it be required.”
“(We are prepared to) go fast, go hard, and not die wondering.”
Matthew Cranston in the Financial Review picked out some different quotes:
“(Falling house prices is) absolutely something we are paying attention to.”
“From what I can tell what we haven’t seen anywhere in the world is a decent fall in house prices in two capital cities at the same time unemployment is going down and the economy is growing at a reasonable pace. This is uncharted territory.”
“This is not a situation we have seen before – it is uncharted territory,”
“Credit is still flowing but at a much slower rate and it’s something we are watching – but that is as much a function of banks willingness to lend and not so much the price.”
We are in uncharted territory in another way: the decline in Sydney house prices is about to go past 10% (unless there is a miraculous turnaround in December), which would make it the largest on record, and the fall in both Sydney and Melbourne in November was the largest in this cycle.
Here’s what Cameron Kusher of CoreLogic told me in the Talking Finance podcast on Thursday: “I think it is a bit of a cause for alarm that, as you say, this late into the cycle, with 16 months into the downturn in Sydney, 13 months in Melbourne, the fact that we are seeing acceleration says that it probably is not as orderly as we’re led to believe.”
And as Guy Debelle points out, this is not caused by a rate hike, but a credit squeeze, so a rate cut next year might not make any difference.
As for a recession in Australia, the first in 27 years, as predicted by Saxo – there are now two separate economies in Australia: government and exports in one, and private investment and consumption in the other.
The second of those, domestic consumption and business investment, is already in recession.
Of the 0.3% GDP growth in the September quarter, 0.35 percentage points came from public demand and 0.35pp from net exports, in other words the private, domestic economy went backwards.
Tourism, iron ore, coal and now LNG exports are likely to remain strong and so will government infrastructure spending, at least for a while.
The other important, but overlooked, factor in public demand is the NDIS. What’s happening is that disability services previously provided by families to their loved ones, and not measured by the ABS, are now being shifted to the NDIS and into the GDP measured by the ABS. The “product” – caring for disabled people – doesn’t change, it’s just popping up in the GDP numbers now.
So I would guess we won’t have an official recession of two successive quarters of negative GDP for those reasons, but it could be close and the “domestic recession”, if I can call it that, is likely to deepen.
Will that prompt a rate cut? Yes. I think the next move in interest rates is likely to be down, not up.
This bloke reckons Tuesday’s big sell-off on Wall Street was due to Brexit. Maybe, although I doubt it. But then, he’s pretty convincing. Anyway it’s interesting.
Interview with this year’s winner of the Nobel Prize in Economics, Paul Romer. It’s interesting throughout, but the first question is a good one: Shouldn’t the internet have boosted economic growth more? Answer: “[laughs] Well, you would’ve expected it to. Maybe it did, relative to what growth would’ve been in the absence of the internet. It’s also possible that it will have an effect on output that we won’t see for 10, 20 years.”
How will Labor’s negative gearing rules apply?
2018 summed up in 5 charts.
George HW Bush’s decision to support a modest tax increase in 1990 … was an inflection point in the history of the conservative movement and the Republican Party. Forces within the party destroyed Bush to advance their own ambitions and agenda. This effort was wildly successful, putting the far right in complete control of the GOP’s ideology.
New analysis from BloombergNEF shows that the rising cost of coal power generation in Australia’s is the main cause of the recent doubling of power prices on the National Electricity Market.
Morgan Stanley: why 2019 will be the turning point:
- US and European yields converge
- The US dollar makes a definitive cycle peak
- Emerging markets (EM) stocks and bonds outperform
- US equities and high yield underperform
- Within equities, value outperforms growth
Ken Henry’s statement to the banking royal commission was “misguided” says an academic: “If my students answered an exam question in this way, they would fail the subject.”
A great, but bracing, BBC interview with Warren Buffett’s partner, Charlie Munger. For example: “if investors are not willing to act with equanimity to a market price decline of 50%…they’re not fit to be a common shareholder and deserve the mediocre result they are going to get’.
A side by side comparison of the two statements from Trump and Xi about their trade cease-fire. They are completely different! I suppose we shouldn’t be surprised, but I am!
The Chinese point of view is that the US is trying to knock them off their growth trajectory. They believe they are going to be the biggest economy in the world, that they should be impacting the world, and that the US is just sour grapes about being a weaker power.
Trump and Putin: a love story. This is a marvellous (long) piece. “Vladimir Vladimirovich Putin and Donald J. Trump are locked in a humid political embrace, which seems, at first glance, unlikely.”
One of the most interesting aspects of American politics is the role of religion, and specifically ”evangelicals” support for Donald Trump in 2016. This is a very good interview on that subject on the Religion and Ethics Report by Andrew West, with an expert on the subject, Luke Bretherton
An excellent summary by Tim Colebatch of the Victorian election.
A review of Michael Lewis’s new book about Trump, The Fifth Risk: “We all know that people in power deploy distraction as a professional skill, much as magicians do. We are used to it. In every act of political communication, “Look at this” is always the explicit obverse of an implicit “Don’t look at that.” But Trump confounds us by using as distractions the very things that other politicians want to distract us from.”
Money is draining out of Britain, but not because of Brexit – because of the prospect that Jeremy Corbyn will become PM.
Why we stopped trusting elites. The credibility of establishment figures has been demolished by technological change and political upheavals. But it’s too late to turn back the clock.
Paul Bassat to start-up entrepreneurs: “What is your right, your entitlement to solve this problem? And what’s unique about you’re doing? Saying ‘I’ve got better data scientists’ probably isn’t really going to cut it.”
I happened to hear this “Future Tense” programme on Radio National the other day, about a new form of public transport that’s a cross between bus and tram, using artificial intelligence and GPS. It seems to be a tram that doesn’t have rails, being introduced in China. Amazing, and huge!
As many as 3,000 journalism jobs have been lost in Australia this decade, the vast majority of which have come from newspaper newsrooms. The consequences for the information needs of the public are profound, but what happened to the journalists?
This mob asked 105 thinkers two questions: What worries you most about the future? What gives you the most hope about the future? Their fears are collected here. If you’d like to read only the hopes, click here.
The excellent Katherine Murphy on the demise of Malcolm Turnbull: “Turnbull came to the job not really comprehending that politics had changed, that something had broken and he wasn’t the person to fix it. He assumed that dispatching Abbott from the Liberal Party leadership would turn back the clock, that Australian politics could return to the time before the member for Warringah ripped up the rules of engagement in order to tear down a Labor government. He was wrong.”
“Well, if you guys are just going to stare at me, I’m going to bed.” When the Beatles met their idol, Elvis.
52 things I learned in 2018. “6. In Uganda, half the population is under the age of 15. 34. Using a middle initial makes people think you’re clever. 47. In New York City, there are around 1,000 crosswalk buttons. In 2018, only 100 are functional, down from 750 functional buttons in 2004.”
“It’s rare you can put your finger on the precise moment your life changed. In my case, it involved an actual finger. “You have a bit of hardness on one side of your prostate,” my doctor reported. “It could be nothing, but let’s do a blood test.””
How did restaurants get so loud? “Restaurants are so loud because architects don’t design them to be quiet. Much of this shift in design boils down to changing conceptions of what makes a space seem upscale or luxurious.”
It’s getting harder to spot a deep fake video. This is actually astonishing, and scary!
What happens when a bubble freezes. Beautiful.
Why engagement rings objectify women.
Really nice piece about George HW Bush by Maureen Dowd, who was the New York Times White House reporter when he was president. “Put it this way,’’ he wrote me once. “I reserve the right to whine, to not read, to use profanity, but if you ever get really hurt or if you ever get really down and need a shoulder to cry on or just need a friend — give me a call. I’ll be there for you. I’ll not let you down. Now, go on out and knock my knickers off. When you do, I might just cancel my subscription.”
“When you get to a place where you think, ‘Oh I’m so fabulous, I did this so well,’ you’re screwed.” An interview with Danielle Steele in the aftermath of her 174th book.
Four years to go: Qatar prepares for the “most unfeasible World Cup ever” in 2022. The rich, tiny, embattled Gulf State is spending $10 billion on new stadiums and $200 billion on new infrastructure including a metro. If the expected 1.5 million football fans arrive, a two-way culture shock seems inevitable. Qatar is a conservative Muslim country where homosexuality is illegal, “modest” dress is required at sporting events, and public drinking is illegal.
2019 will be the “year of the fee”. “Investors who were already alarmed by Ray Dalio’s publication of ‘Bridgewater: Radical transparency and the way of the Samurai trader’ renew their flight from its risk parity funds. “He’s basically just hedging stocks with bonds, and they are both going down this year, so what’s the point?” asks one disillusioned client.”
Meet Brian Evans, 3rd principal trumpet and cornet for Opera Australia for 43 years.
How Britney Spears built a billion-dollar business without selling a single record.
My son Chris’s wedding is in February and we all have to pick a song to dance to. I’ve just found mine: “Till I’m Done” by Paloma Faith. I’m sitting here as I write this dancing away in my chair! Magnificent.
Happy Birthday Gregg Allman, born on this day in 1947, in Nashville Tennessee, and died in 2017. He was most famous for a while for marrying Cher in 1975, but of course that didn’t last. Here he is in 2015, aged 68, doing Midnight Rider, which he regarded as his signature tune.
It’s also Jim Morrison’s birthday – he was born 1943 and died 27 years later, officially from heart failure, in the bathtub, but no autopsy was performed. He was buried in Pere Lachaise Cemetery with Oscar Wilde and Edith Piaf. Here he is doing Light My Fire live – there really was something about him.
Oh and it was Dave Brubeck’s birthday on Thursday, born December 6, 1920, and would you believe he died in 2012 – aged 92! Anyway, I must have listened to Take Five a thousand times when I was teenager (Brubeck is the pianist). Loved it. (Weirdly, I was a jazz fan then, as well as blues, and Creedence Clearwater Revival. And Chicago and the Beatles).
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 email@example.com then keep an eye out for the Facebook Live video in next week’s Overview.
By Craig James, Chief Economist, CommSec
Australia: Consumer and business confidence surveys in focus
- The year begins to wind down with consumer and business surveys complemented by housing and wealth data. The Reserve Bank (RBA) releases its quarterly Bulletin and speeches are made by Assistant Governor (Financial Markets) Christopher Kent and Marion Kohler, Head of Domestic Markets Department.
- The week kicks off on Monday when the Australian Bureau of Statistics (ABS) releases data on housing finance. Investor lending continues to decline due to weakening demand for homes (and falling home prices) in Sydney and Melbourne following greater regulatory oversight of bank lending practices. But the value of owner-occupier home lending is forecast to rebound by 3 per cent in October, supported a pick-up in lending to first home buyers.
- Also on Monday, RBA Assistant Governor (Financial Markets) Christopher Kent speaks about “US Monetary Policy and Australian Financial Conditions” at the Bloomberg event in Sydney.
- On Tuesday, the ABS releases its publication Residential Property Price Indexes. The data is relatively “old”, focusing on the three-month period to September 30. Apart from home prices there is other data covering the average value of homes and changes in the number of homes in each state.
- Also on Tuesday, the regular weekly reading on consumer confidence is published by ANZ and Roy Morgan. And NAB releases the November business survey. The NAB business conditions index eased from +14 points to +12 points in October. Business confidence fell from +6 points to +4 points.
- On Wednesday broader lending figures are released. The data on home loans is provided, but together with business, lease and personal loans. Total new lending commitments (housing, personal, commercial and lease finance) rose by 3.6 per cent in September to a 10-month high of $71.8 billion.
- Also on Wednesday Westpac and the Melbourne Institute release the December monthly reading on consumer confidence. The index rose by 2.8 per cent in November. Falling petrol prices should boost sentiment. And the Reserve Bank releases October data on credit and debit card lending.
- On Thursday the ABS releases the Finance & Wealth publication, which contains the most complete figures on household finances. Total household wealth (net worth) rose by 1.0 per cent to $10,357.5 billion at the end of June 2018. In per capita terms, wealth rose from $411,821 to $414,463 in the June quarter.
- Also on Thursday the Reserve Bank’s Marion Kohler, Head of Domestic Markets Department, speaks at the 31st Australasian Finance and Banking conference, Sydney. The Bank’s quarterly Bulletin is also issued.
- On Friday, the CBA releases its November ‘flash’ purchasing manager’s manufacturing and services surveys.
Overseas: China monthly economic data steals the limelight from US inflation and retail sales
- China releases inflation, retail sales, industrial production, investment and house price data over the week. In the US, inflation, industrial production and retail sales data will be in focus.
- The data week kicks off on Sunday when China releases its producer and consumer prices data. Business inflation has decelerated for four consecutive months due to weakening domestic demand and trade concerns.
- n Monday in the US, the Labor Department releases its JOLTS survey for October. Job openings edged lower in September to just over 7 million from a record 7.3 million in August.
- The usual weekly data on US chain store sales is released on Tuesday along with producer prices and the National Federation of Independent Business (NFIB) Small Business Optimism index. Producer prices rose by 0.6 per cent in October – the most in six years – as the cost of goods and services lifted.
- On Wednesday in the US, the regular weekly data on mortgage applications is released together with inflation data. Headline consumer prices rose by the most in nine months in October. Increases in the cost of gasoline and rents pointed to steadily rising inflation that likely will keep the Federal Reserve on track to raise interest rates again on December 19.
- Also on Wednesday the US Treasury releases the November update on the government’s fiscal position. The US budget deficit likely widened to US$100 billion in October, up from US$63 billion a year ago.
- On Thursday the weekly data on new claims for unemployment insurance and export/import prices data are issued for November.
- On Friday in China, monthly retail sales, industrial production and investment data are all scheduled. Investment is expected to continue lifting on the back of government stimulus. Retail sales are also forecast to rebound, supported by tax cut plans.
- Also on Friday in the US, industrial production and retail sales data are issued.
- And Markit’s ‘flash’ purchasing managers’ indexes will be released globally. Manufacturing gauges have eased recently.
- On Saturday, China house prices are scheduled for release. Annual house prices were up by 8.6 per cent in October.
By Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital.
Investment markets and key developments over the past week
- The past week has been a roller coaster ride in equity markets. Shares initially rose on the positive outcome from the Trump/Xi meeting. Then they plunged in a panic as investors lost faith in what Trump claimed was agreed, the arrest of a senior Huawei executive in relation to a possible violation of sanctions on Iran raised concerns it will threaten US/China negotiations and concerns grew about the US economic outlook as parts of the US yield curve went negative (or inverted). Then they rebounded in the US after having fallen back to October and November lows, possibly helped by reports that the Fed is considering a wait and see approach after a December hike. This still saw US, Eurozone and Japanese shares down for the week (albeit reversing the previous week’s gains), but Chinese shares rose and Australian shares rose (don’t forget they fell in the previous week). Growth worries also pushed bond yields lower & commodity prices were mixed with oil up but not helped by the failure of OPEC to agree a production cut (yet). The $A fell from its highs but still managed a slight gain for the week.
- It’s still too early to say shares have seen the bottom. So far what we have seen is just a correction (with global and Australian shares having had falls around 10%) and shares may be trying to build a base, with US/global shares holding around their October lows, ahead of a year-end Santa rally. But investor scepticism remains very high evident in good news being ignored (like strong US ISM reports) and bad news being blown out of proportion (like in the Fed’s Beige Book) and many of the concerns around share markets – notably in relation to the Fed and trade – remain unresolved. So, share markets could yet go down further into early next year in what we have referred to as a “gummy bear” market, ie where markets come down 20% or so before rebounding like we saw in 2015-16. However, we remain of the view that a “grizzly bear” market – where shares fall 20% and a year later are down another 20% or so – because a US/global recession is unlikely soon. The two big concerns of the last week look overdone.
- First, while the Huawei arrest adds to the risks and despite Trump’s exaggeration causing confusion, Trump and Xi do look to have made progress on trade in Buenos Aires. In fact, Trump remains positive, further tariff hikes are on hold, China has confirmed the 90-day timetable for negotiations, it has indicated it will push forward with negotiations and has reportedly restarted imports of certain products. It could still go off the rails, but progress was made and there is a strong incentive for both sides to make a deal to resolve the issue before it weakens their economies (which won’t be good for Trump’s 2020 re-election). Note the Fed’s Beige Book referring to capex plans being put on hold partly due to trade uncertainty.
- Second, the sudden frenzy over a bit of the US yield curve is whacko. Prior to the past week I had never heard of anyone focussing on the gap between US 5 year and 2-year bond yields – which has now gone negative. Similar to the Fed’s own research our view remains that the yield curve to watch is the gap between the 10-year bond yield and the Fed Funds rate and its flattened but is still positive at 76 basis points. And another useful version of the yield curve (inspired by Fed research) in the form of the gap between 2-year bond yields and the Fed Funds rate is also a long way from negative. As can be seen prior to the last three US recessions both of these yield curves inverted – but there were several false signals and the gap between the initial inversion and recession can be long averaging around 15 months. So even if they both invert now recession may not occur until 2020 and yet historically share markets only precede recessions by around 3-6 months so it would be too far away for markets to anticipate.
- Of course, when investors want to sell they will and so markets can still head lower until there is a sentiment washout. But our assessment remains that this is overdone, and share markets aren’t going down into another grizzly bear market as the conditions aren’t in place for a US/global recession: we haven’t seen the sort of excess in discretionary spending, debt and inflation that normally precede recessions; monetary policy is not tight (and the Fed is likely to pause next year); and the slowdown in growth indicators looks like the short lived shallow slowdowns we saw into 2012 and 2016.
- The Brexit comedy continued with the Government being defeated on several votes in parliament and PM May’s plan looks likely to be rejected on December 11. It could pass on a second vote if UK markets kick up a fuss and some groups abstain. But the alternatives are not flash: do some tweaks to the deal (but its doubtful the EU will agree); have a no deal Brexit (but this would likely plunge the UK in recession); cancel Brexit (but this would cause a huge fuss in the absence of another referendum and that would take longer than March to organise). The key for investors though is that while its a critical issue for the UK and UK assets, apart from adding to the noise Brexit is really just a second order issue for global markets.
Major global economic events and implications
- Despite investors’ fears of a collapse in US growth, US data releases over the last week were actually strong. Yes, the Fed’s Beige book referred to some waning of optimism in some districts as contacts cited tariffs, rates and the tight labour market and construction spending fell. However, the ISM business conditions PMIs were very strong and actually increased in November and jobs data was strong.
- China’s Caixin PMI’s surprisingly rose in November painting a more upbeat picture than the official PMIs. (Don’t know what the China data sceptics made of that one!)
- India’s composite business conditions PMI rose to its highest in two years – bucking the global trend to weaker PMIs.
Australian economic events and implications
- Australian economic data was weak, and we now see the RBA cutting interest rates in the year ahead. September quarter GDP came in at just 0.3%qoq driven by very weak growth in consumer spending which saw annual growth fall back to just 2.8% which is well below the RBA’s expectation for growth around 3.5%, building approvals continue to trend down, retail sales rose modestly but the previous month was revised down, momentum in job ads is continuing to slow pointing to slower employment growth ahead, the trade surplus fell slump in home prices accelerated in November led by Sydney and Melbourne. And to cap it off the Melbourne Institute’s Inflation Gauge showed even slower inflation in November.
- Growth is nowhere near as strong as the RBA is expecting and its likely to revise down its forecasts. Yes, public spending is strong, business investment is looking healthier and export earnings are doing well but the housing construction cycle is turning down and falling house prices will weigh on consumer spending. As such growth is likely to be constrained around 2.5-3% over the year ahead. Given the combination of falling house prices, tight credit conditions and constrained growth which will keep wages growth weak and inflation below target we see the next move being a rate cut. However, it will take a while to change the RBA’s thinking, so we don’t see rates being cut until second half next year, but won’t rule out an earlier move if things are weaker earlier than we are expecting. By end 2019 the cash rate is likely to have fallen to 1%.
- Sure the RBA is repeating the mantra that the next move in rates is more likely up than down, but just not yet (with the latest being Deputy Governor Debelle’s speech this week), but RBA commentary won’t always tell us what it might soon do (remember the February 2015 rate cut!) and the RBA has recently indicated that it is getting a bit more focussed on the risks around credit and Dep Gov Debelle has pointed that the RBA has more to go to the bottom of the easing barrel (ie 150 basis points on rates and quantitative easing if needed).
What to watch over the next week?
- In the US, the focus will be back to inflation with the CPI data due Wednesday expected to be flat in November thanks to the oil price plunge and annual inflation falling back to 2.2% from 2.5%. Core inflation is expected to remain around 2.1%yoy. In other data expect to see strong job openings (Monday), continued high small business optimism (Tuesday) and retail sales and industrial production (Friday) to remain strong. US business conditions PMIs for December (also due Friday) are likely to remain solid at around 55.
- The European Central Bank meets Thursday is expected to confirm that it will end quantitative easing this month, but its likely to commit to re investing maturing bonds for an extended period, indicate that it will provide more cheap funding for banks if needed and reiterate that a rate hike is a long way away. December business conditions PMIs (Friday) will likely show further slippage but still be at okay levels.
- In Japan, the Tankan business survey (Friday) is likely to show some slippage in conditions.
- Chinese economic data for November due to be released on Friday is expected to show growth in industrial production remaining around 5.9%yoy but a pick up in investment to 5.9% and a pick up in retail sales to around 8.8%.
- In Australia, expect to see another fall in housing finance (Monday) of around 1%, ABS data on Tuesday to show a 1.7% fall in house prices for the September quarter consistent with private sector surveys and soft readings for business and consumer confidence (Tuesday and Wednesday).
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%.
- Beyond any further near-term bounce as the Fed moves towards a pause on rate hikes next year, 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 as the RBA moves to cut rates. Being short the $A remains a good hedge against things going wrong globally.