The positive global lead, along with a fall in new Victorian coronavirus cases, saw Australian shares rise 2% to the top end of the range they’ve been in since June, with strong gains in consumer staple, financial, real estate and retail stocks leading the gains. Bond yields rose sharply on the back of rising inflation expectations. Oil, copper and iron ore prices rose, but the gold price corrected as bond yields rose. The A$ rose slightly as the US$ fell.
While watching The Sound recently on the ABC – which reminds me of a modern day Countdown and Sounds - I came across this excellent collaboration by JPY and a bunch of other Australian performers of The Easy Beats’ Friday On My Mind. What a classic! Harry Vanda and George Young were Australia’s equivalent of Lennon and McCartney, but they never quite get the recognition they deserve. So, do yourself a favour and check this one out.
And thankfully The Bachelor has taken over from The Bachelor in Paradise – providing another way to turn down the noise!
US data was good. Small business optimism fell a bit in July, but underlying retail sales rose again in July (and by more than expected), industrial production also rose, job openings recovered further in June and weekly initial jobless claims fell sharply, taking them below 1 million for the first time since March.Consumer and producer prices rose by more than expected in July, making up for the extreme weakness seen in March, April and May. Meanwhile, negotiations for the next stimulus package look to have stalled, with the further decline in jobless claims and Trump’s executive orders extending some stimulus reducing some of the pressure for now and aid for states being the main sticking point. Some sort of stimulus package however still looks likely, as this is still needed to keep the recovery going and both sides don’t want to get blamed for letting it falter. A deal may not come till September though.
UK GDP contracted a whopping 20% in the June quarter (and that’s not annualised!), but again this is ancient history with activity already starting to recover.
This is evident in more timely data for the eurozone, with industrial production up 9% in June and various business surveys up in July and August.
Chinese industrial production and retail sales data for July were a bit softer than expected, possibly reflecting widespread flooding, but indicative that the recovery remains on track. Annual growth in industrial production was unchanged at +4.8% year-on-year, retail sales growth improved to -1.1% year-on-year (from -1.8%), investment rose +6.1% year-on-year (up from +4.1%), unemployment was flat and new home prices continue to rise. Meanwhile, most high frequency data for August (for car sales, property transactions, traffic congestion etc) are running around normal levels and while credit growth in July was weaker than expected, it still edged higher. Inflation rose, though this was all due to higher food prices, with core inflation actually falling to just 0.5% year-on-year.
Australian jobs data surprised on the upside for July, with employment up by nearly 115,000 and unemployment “only” rose to 7.5%. The good news is that 343,100 of the 871,500 jobs lost between March and May have been recovered and “effective unemployment” (which is a guide to what unemployment would be were it not for JobKeeper and the decline in labour force participation) fell to 10.2% from 14.9% in April. The bad news is that effective unemployment of 10.2% is still very high, underemployment remains a very high 11.2%, the July jobs data relates to the first half of July (and so missed much of the Stage 3 lockdown of Melbourne) and unemployment is likely to rise significantly this month as the now tougher lockdown of Melbourne impacts. As a result, we remain of the view that official unemployment will rise to around 10% by year end. However, at least the decline in the effective rate shows that it can go in the right direction as the economy reopens.
Source: ABS, AMP Capital
Reflecting the hit to the labour market, wages growth slowed sharply in the June quarter, with more weakness likely on the back of high unemployment and underemployment. Meanwhile, on the back of the Victorian lockdowns, the NAB business survey showed a fall back in business confidence in July and consumer confidence for August fell back to near its April low. There was some good news though, with new home sales remaining strong in July as HomeBuilder provided assistance.
It’s still early days in the June half earnings season, with only around 18% of companies (representing 36% of market capitalisation) having reported so far, but it’s clear that company earnings have been hit hard by coronavirus. So far, only 25% of results have exceeded expectations (compared to a norm of around 44%), only 38% of results have seen earnings rise from a year earlier (compared to a norm of 66%) and 47% have cut dividends (compared to a norm of just 16%). Consensus earnings expectations so far for 2019-20 have fallen slightly to -21.6% (from -21% two weeks ago) and this will be worse than the -20% earnings decline in the Global Financial Crisis and the worst fall since the early 1990s recession. See the final profit chart below.
Source: AMP Capital
In the US, expect the minutes from the last US Federal Reserve (Fed) meeting (Wednesday) to remain dovish and commentary consistent with a move in September to inflation average targeting, which will imply a desire for a period of above-target inflation. On the data front, expect continued strength in home building conditions (Monday) and further gains in housing starts (Tuesday) and existing home sales (Friday), but a possible pullback in August business conditions PMIs (Friday) reflecting the July resurgence in coronavirus cases.
Note that the US and China have reportedly postponed talks to review progress on the phase one trade deal, which had been “scheduled” for August 15. Our view remains that while President Trump may have lost interest in the trade deal, he is unlikely to want to do anything that will dramatically damage the US growth outlook and hence his re-election prospects (like big broad based tariff hikes) at this stage, but with Trump, you never know! Larry Kudlow said the trade deal is going well.
Eurozone business conditions PMIs for August (Friday) are also at risk of some pullback, reflecting the second wave of coronavirus cases in parts of Europe.
Japanese June quarter GDP is expected to show a -7.6% quarter-on-quarter slump on the back of the coronavirus lockdown. Inflation likely remained low in July and August business conditions PMIs may also have been affected by the recent resurgence in coronavirus.
In Australia, the minutes from the last RBA board meeting are expected to show that it’s uncertain about the recovery and remains dovish with an easing bias. On the data front, expect preliminary retail sales data for July to remain flat, but the CBA’s composite business conditions PMI for August to have fallen slightly, reflecting the Victorian lockdown. Both are due Friday.
The Australian June half profit reporting season will ramp up, with many major companies due to report, including Amcor and JB HiFi (Monday), BHP, Cochlear and Coles (Tuesday), Boral, Brambles, CSL and Tabcorp (Wednesday), the ASX, Coca-Cola Amatil, Qantas and Wesfarmers (Thursday) and Suncorp (Friday). Consensus expectations remain for a -21% slump in earnings due to the hit from coronavirus. Financials will likely be the hardest hit, with an expected -29% slump in earnings led by insurers and the banks, followed by industrials, with a -15% fall in earnings and resources, with a -12% hit. Consumer discretionary may be the only sector to see a rise.
After a strong rally from March lows, shares remain vulnerable to short term setbacks given uncertainties around coronavirus, economic recovery and US/China tensions. But on a 6 to 12-month horizon, shares are expected to see good total returns, helped by a pick-up in economic activity and policy stimulus.
Low starting-point yields are likely to result in low returns from bonds once the dust settles from coronavirus.
Unlisted commercial property and infrastructure are ultimately likely to continue benefitting from a resumption of the search for yield, but the hit to economic activity and hence rents from the virus will weigh heavily on near term returns.
Australian home prices are falling and higher unemployment, a stop to immigration and rent holidays will likely push prices lower into next year. Home prices are expected to fall by around 10%-15% from their April high into next year, with the risk of bigger falls if the renewed rise in coronavirus cases leads to a renewed generalised lockdown. Melbourne is particularly at risk on this front, as its Stage 4 lockdown pushes more businesses and households to the brink.
Cash & bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.25%.
Although the A$ is vulnerable to bouts of uncertainty around coronavirus, the economic recovery and US/China tensions, a continuing rising trend is likely - particularly with the US expanding its money supply far more than Australia is (via quantitative easing) and with China’s earlier recovery supporting demand for Australian raw materials (assuming political tensions between Australia and China are kept to a minimum).
DR SHANE OLIVER
HEAD OF INVESTMENT STRATEGY AND CHIEF ECONOMIST
About the Author
Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capitals' diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.
THIS ARTICLE WAS RELEASED BY AMP CAPITAL 14 AUGUST 2020, FOR MORE AMP CAPITAL UPDATES GO TO WWW.AMPCAPITAL.COM.AU
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