“The RBA statement contained little new, unsurprising given the raft of speeches since the last meeting. It is sticking to its base case for 3% growth in 2019 and an eventual move lower in the u-rate which remains optimistic in our view, and suggests the hurdle to cut is not that high if growth and unemployment fall short of the RBA’s base case (though the fwd curve is already priced that way),” RBC’s global head of FX strategy Elsa Lignos said in an overnight note.
The first hurdle for the RBA is today’s fourth quarter GDP report and if the recent partials are indicative of the economy’s current state, there’s downside risk, Ms Lignos also said.
TD Securities is forecasting a 0.2 per cent quarterly increase and a 2.4 per cent annual one. TD puts the market at plus 0.4 per cent for the quarter and plus 2.6 per cent for the year.
“A Q4 GDP outcome of +0.2%/qtr or below potentially paves the way for the RBA to shift to an explicit easing bias,” TD said. “The AUD at US70.80¢ is near the bottom of its recent range and poised to test US70¢ should GDP disappoint again. Ahead of the RBA, OIS was 83% priced for a November 25bp cut, and now 91% priced awaiting GDP.”
“We remain of the view that a low and stable exchange rate is more beneficial for the economy than another rate cut. TD and consensus expects the 1.5% cash rate to prevail through to mid-2020,” it also said.
NAB chief economist markets Ivan Colhoun said while the RBA’s Tuesday statement reiterated its optimism about the economy, it posed some questions too.
“The inclusion of employment as a driver for growth [in the RBA statement] is most unusual – rising employment is usually a consequence of strengthening growth, rather than a driver. There’s a clear puzzle for the RBA between the continuing strength in Australia’s labour market and what it acknowledges in today’s statement as a slowing in growth in the second half of 2018.
“If growth remains reasonable unemployment should remain low,” Mr Colhoun said. “The bank seems happy in this scenario to allow the housing correction to run its course, as consumer spending would hold up. If there are signs consumer spending is weakening due to housing spillovers, unemployment would likely begin to rise and the downside growth scenario would be in play with some further reduction in interest rates likely.”
NAB forecast is that Australian interest rates are unlikely to rise in the next 12-18 months. There is increased risk that the RBA will decide to further reduce the cash rate sometime this year, Mr Colhoun said.
The Australian Financial Review Business Summit
Local data: RBA governor Philip Lowe speaks at 9.10am AEDT, Fourth quarter GDP at 11.30am AEDT
Overseas data: US ADP employment report February, Trade balance December, Federal Reserve’s Beige Book
SPI futures up 9 points or 0.2% to 6189 at about 8.15am AEDT
AUD -0.1% to 70.86 US cents (Overnight low 7059)
On Wall St: Dow -0.1% S&P 500 -0.1% Nasdaq flat
In New York, BHP +0.2% Rio +0.4% Atlassian -0.3%
In Europe: Stoxx 50 +0.3% FTSE +0.7% CAC +0.2% DAX +0.2%
Spot gold -0.3% to $US1283.33 an ounce at 12.41pm New York time
Brent crude +0.1% to $US65.72 a barrel
US oil +0.1% to $US56.62 a barrel
Iron ore -0.8% to $US87.03 a tonne
Dalian iron ore -0.2% to 619 yuan
LME aluminium -0.1% to $US1874 a tonne
LME copper +1.1% to $US6478 a tonne
2-year yield: US 2.55% Australia 1.72%
5-year yield: US 2.53% Australia 1.76%
10-year yield: US 2.72% Australia 2.15% Germany 0.17%
US-Australia 10-year yield gap as of 7.25am AEDT: 57 basis points
From Today’s Financial Review
Optimism pervades Financial Review Business Summit: Most importantly for Australian investors was the directional guidance from experts about the two biggest swing factors that will hit equity portfolios in the year ahead: China and Donald Trump.
Shorten: election is ‘referendum on wages’: Labor Leader Bill Shorten will take the economic fight to Scott Morrison on Wednesday and declare the next election to be a referendum about wages.
Analysis: Sydney’s property obsession creates economic hangover: In the first report of its type, the NSW Treasury has published an independent update of the state economy. It shows the continuing property market downturn has made citizens more cautious.
The S&P 500 has climbed about 11 per cent in 2019 and is now about 5 per cent away from its September 20 record closing high, helped by a dovish stance from the Federal Reserve and on hopes the United States and China would soon hammer out a trade solution.
“We’ve had a nice rebound this year, but investors have to face the reality of the earnings fundamentals which continues to deteriorate,” Michael Geraghty, equity strategist at Cornerstone Capital Group in New York City.
Analysts now expect first-quarter earnings to fall 1.3 per cent year-over-year, compared with prior expectations of 5.3 per cent rise at the start of the year, according to Refinitiv data. It will be the first drop in quarterly earnings growth since 2016.
Recessions getting tougher to predict: First-quarter weakness won’t necessarily signal that a recession has begun or is even close at hand.
Fundstrat Global Advisors: “Intermediate-term momentum indicators, tracking multi-months, continue to build to the upside into (good) overbought territory and are likely to show evidence of peaking heading in late Q1/early Q2. Recent reversals from new highs in leading Software stocks is likely in the early stages of a broader pause/consolidation we expect will develop in the coming 2-4 weeks. Equity indices are at next resistance with S&P and Russell 2000 indices at their Q4 highs at 2813 and 1615, respectively.”
Fundstrat bullish positioning: “Given we view the rebound from the rising 200-week sma in late December as being the early stages of a new 4-year market cycle, our expectation remains that any pause/consolidation in Q2 is likely to be relatively shallow and an opportunity to add to both secular growth leadership and the emerging leadership in Cyclicals.
“In fact, there is early evidence developing to support a case that a rotation from leaders to laggards is beginning to develop as leading growth stocks, such as Software, pause and laggards begin to emerge.
Fundstrat sees tactical/trade ideas (select Healthcare) to timely lagging cyclicals (Cement and Aggregates) to FAANG which has lagged but is now showing evidence of emerging. “In short, we expect a highly rotational environment to develop in Q2 that should favour active managers taking advantage of sector and group rotations as markets digest their Q1 gains.”
European stocks edged higher at the close of a choppy and directionless session where indexes hovered around the flotation mark in the lack of news about Sino/US trade talk.
The pan-European STOXX 600 closed up 0.2 per cent after trading in the red for part of the day, extending a three-day rally into four straight days of gains.
It was also a bad day for European banks which lost 0.4 per cent with shares in Austria’s Raiffeisen Bank International falling more than 12 per cent.
The share price falls followed a report by a collective of European news outlets called the Organised Crime and Corruption Reporting Project which was based on what it said were leaked documents detailing transactions worth more than $US470 billion sent in 1.3 million transfers from 233,000 companies.
Pantheon Macroeconomics on euro zone PMIs for February: “The composite PMI in the Eurozone rose to 51.9 in February from 51.0 in January, above the consensus and initial estimate, 51.4.
“A robust headline, signalling that services continue to show relative resiliency in the face of the sustained slowdown in manufacturing. The headline was pushed higher from its initial estimate thanks to slightly higher composite readings in Germany and France, 52.8 and 50.4 respectively, on account of better than expected headlines in services. Elsewhere, the Spanish composite PMI fell to 53.5, from 54.5 in January, chiefly due to weakness in manufacturing.
“The services index fell marginally, to 54.5. Finally in Italy, the composite PMI rebounded to within a whisker of 50, at 49.6, boosted by a small rebound in services.
“Overall, these data still point to sluggish growth in the EZ economy. New business in the private sector was flat as increasing demand for services just about managed to offset the continued fall in manufacturing. Employment rose further, but the rate of improvement is slowing as new business growth is easing, and work backlogs are no longer rising, if not falling outright in manufacturing. Finally, the details on prices suggest that input price inflation is now declining slightly as lower costs of raw materials offset higher wages.”
China will cut nearly 2 trillion yuan in taxes and fees for companies, Chinese Premier Li Keqiang said at the National People’s Congress on Tuesday.
The special bond issuance quota for local governments, a key source for infrastructure investment, has been set at 2.15 trillion yuan, according to the finance ministry. Last year’s quota was set at 1.35 trillion yuan.
Beijing will also step up targeted cuts in the reserve requirement ratio for smaller and medium-sized banks with an aim to boost lending to small companies by large banks by more than 30 per cent, said Li.
Market reaction was muted as Li, in the same address, said China will target an economic growth of 6.0 to 6.5 per cent in 2019, less than the 6.6 per cent gross domestic product growth reported last year.
At the close of trade, the Hang Seng index was flat at 28,961.60 points, while the Hang Seng China Enterprises index rose less than 0.1 per cent.
The Shanghai Composite index was up 0.9 per cent at 3054.25 points, while the blue-chip CSI300 index rose 0.6 per cent.
Opinion: Why Trump is a gift to China: The key problem of our time will be US-China relations. We feel very much this way also inside China.
Government rebuffed Huawei’s security offer: The federal government rejected a proposal by Huawei to build an independent cyber security evaluation centre to allay concerns about espionage.
Business Summit: If forced, Australia ‘will choose its security’: If Australia ever has to choose between China and the United States, “between economic prosperity and its security, it will choose its security,” says former federal treasurer Peter Costello.
Tension growing on RBA’s rate patience: The official cash rate has been held at 1.5 per cent for the 28th time in a row as expectations of a rate cut steadily build.
Bank of England governor Mark Carney said the fact that the central bank’s most recent economic forecasts showed inflation above the BoE’s target over its three-year forecast period meant investors had not priced in enough monetary tightening ahead.
“In other words, the path of interest rates is not firm enough, it’s not quite high enough for us to be fulfilling our mandate, which sends a broad signal in terms of the stance of policy,” Carney told a committee in the upper house of Britain’s parliament on Tuesday.
BAML on ECB policy: “We expect the ECB to announce the principle of LTRO/TLTRO without formal change to forward guidance. Details on the long-term liquidity injections (targeted vs unconditional, variable vs fixed rate) would be disclosed later on. If risks materialise in 2Q, the ECB will have to make radical moves to its forward guidance.
“We do not expect the meeting to have a sustained market impact. In rates, we look at ways to position/hedge for TLTRO disappointment, given optimistic market expectations. The wait-and see approach from the ECB should not have much of a EUR impact this week, but we remain positive on the EUR, as it remains undervalued and Eurozone data could improve following trade deals.”
BAML on the euro: “Our constructive view on the EUR this year may need more time to play out. Our estimates suggest EURUSD is undervalued by about 7%. This is primarily because of the USD overvaluation. EUR is actually overvalued against GBP and JPY. Mixed US data and a dovish Fed should have helped to bring EURUSD back to equilibrium. However, the Eurozone data remain very weak and EUR remains vulnerable to Brexit risks and trade tensions.
“Our baseline scenario for the global economy is consistent with a stronger EURUSD in the months ahead. It is not hard to argue that EURUSD will appreciate following US-China and US-EU trade deals, a Brexit deal, and improvement in China data following recent policy stimulus, as the US economy slows back to potential from one-off strong growth on the back of the fiscal stimulus last year. The Eurozone data have been surprisingly weak and could rebound in this scenario. The ECB could start talking again about rate normalization. A number of things have to go right for EURUSD to strengthen, but we remain optimistic.”
TD Securities on the Bank of Canada: “We expect the BoC will leave the overnight rate unchanged on Wednesday [local time], in line with market expectations. The communique is likely to have a dovish tilt to it, as the recent deterioration in economic data ought to outweigh the impact of higher oil prices.
“Our base case is for the Bank to leave their forward looking language mostly unchanged, warning of higher policy rates over time subject to the evolution of the data.
“Still, the GDP figures do raise valid questions over the Bank’s ability to tighten further, and as such we see a material risk that the Bank pivots to a purely neutral policy stance. We are therefore biased towards long positions in CAD front-end rates and higher USDCAD ahead of the release.”
Rio boss flags more dividends on the way: Rio Tinto has flagged paying more special dividends as the impact of buybacks on its biggest shareholder continues to shape capital management plans for the year ahead.
Fitch Solutions on steel: “We maintain our steel price forecast for 2019 at USD700/tonne as we continue to believe steel demand and prices will be buoyed throughout the year by the Chinese government’s frontloading of infrastructure project approvals initiated in H218.”
On the longer-term outlook: “We maintain our view for global steel prices to ease from current levels in the longer term, and see them averaging USD575/tonne during the 2020- 2023 period and falling to USD530/tonne by 2023. Ultimately, we expect that a combination of slowing Chinese steel consumption growth and rising global steel market protectionism prompting greater production in affected countries to loosen the market and drag prices lower late 2019 and beyond. Chinese domestic demand for steel will slow overall in 2020 and beyond as the rebalancing of the economy away from heavy industry and towards the service sector resumes, which will drag down domestic steel prices in China and thus the global average.”
On global supplies: “The global steel market will post a narrowing deficit of 12.6mnt in 2019, after being in deficit of 28.6mnt in 2018. We forecast the global surplus to average 1.8mnt during 2019-2028, as compared to an average surplus of 0.7mnt during 2009-2018. This improving supply picture will put a lid over prices in the coming years. We forecast an average global stocks-to-use ratio of 6.5% over the next 10 years.”
Fitch on coal and steel: “Additionally, higher coking coal prices in the coming quarter will also support steel prices. We have revised upwards our coking coal price forecast for 2019 from USD180/tonne to USD195/tonne, as currently supplies from Australia are tight due to Anglo American’s suspension of operations at Moranbah North following a mine accident, and to the country’s rail capacity cuts.”
Why women need equities more than men: A $70,000 difference in investment returns between equities and cash goes a long way towards narrowing the retirement savings gap, according to asset manager Fidelity.
Australian shares closed lower on Tuesday despite a rally during afternoon trade as the market paused amid a lack of news on trade talks between the US and China.
The S&P/ASX 200 Index fell 18.1 points, or 0.3 per cent, to 6199.3 while the broader All Ordinaries declined 21.1 points, or 0.3 per cent, to 6281.4.
“The trade talks are the new Brexit, dragging on forever and on everyone’s lips but with no meaningful result,” said OANDA senior market analyst Jeffrey Halley. “They do, however, remain the only game in town and until we get more details markets will trade on short-term news in a wax off, wax on fashion.”
BGH Capital ready to graduate at Navitas
PE giant Denham Capital sets its sights on local prey
PwC, Accenture groups submit visa processing bids, await political unbundling
with Reuters, Bloomberg, AAP
Comments? Questions? Let us know what you think of Before the Bell: email@example.com