Last week global markets managed to shrug off coronavirus concerns – helped by continued solid economic data in the United States. Indeed, there was a better than expected 225k gain in US jobs during January (market expectation 160k) helped by milder than usual winter conditions which usually boosts construction. Importantly, annual wage growth remains stuck around 3% – just enough to support consumer spending but not enough to stoke inflation concerns.
With more than 800 dead, the coronavirus has tragically now already taken more lives than the 774 taken during the 2003 SARS outbreak. But markets are taking some comfort from the fact that – so far at least – it has been largely confined to mainland China (which has reported 99% of the cases so far compared with only 65% during the SARS outbreak) and the overall death rate remains much lower at around 2% rather than 10%. There are also tentative hopeful signs that the daily number of reported new cases has started to drop.
Of course, Chinese economic growth will still likely take a massive hit this quarter, with knock on effects around the world, as it battles to contain the outbreak through trade and travel restrictions. One clear market result has been the slump in the oil price, which is now down 17.5% since the start of the year. The $A has also shed 5% of value this year, while the $US index has gained 2.4%.
Virus concerns should remain front and centre globally this week, and let’s hope for stronger evidence of a peak in new infections. Otherwise, US retail sales on Friday are likely to provide reassurance that US consumer spending continues to tick along nicely.
In Australia, the RBA again tried to strike an upbeat tone last week while leaving interest rates on hold. In its quarterly statement, it forecast a gradual lift in growth this year and a largely steady unemployment rate. On that view, it won’t cut interest rates again this year.
That said, many economists – myself included – continue to doubt the RBA’s optimism. Indeed, as I argued last year, the RBA’s efforts to be a source of “confidence and stability” is straining its credibility, and has also likely encouraged the Federal Government to hold back on providing timely further fiscal stimulus. Either way, my expectation is that notwithstanding the current strength in house and equity prices, consumer spending will remain subdued and employment growth will soon weaken – pushing the unemployment rate to at least 5.5% by June. On that basis, I still see the RBA cutting rates further this year, and the local share market giving back some of its recent global outperformance. I’m still targeting a decline in the $A to US62c.
Indeed, we’ll get an update on the health of the economy with the National Australia Bank January business survey today and the Westpac/Melbourne Institute consumer sentiment report tomorrow. It’s possible, though I doubt recent asset prices gains will be enough to offset the negative impact on confidence from recent bush fire and coronavirus concerns.