QE is coming: BetaShares Weekly Markets Review
Global markets are currently enjoying a “no news is good news period” – ever hopeful that a US-China trade deal will get done, and no news to the contrary is encouraging as it suggests both parties are still at least talking.
What we don’t want is President Trump flying off in a rage again – and jacking up tariffs – due to 11th hour haggling by the Chinese. But as I’ve discussed here previously, Trump seems less likely to do this now given growing signs that an extension of the trade dispute would put the US economy at risk as we head into the 2020 Presidential election year.
Of course, even in this worst case scenario Fed chair Powell reminded us last week that he stands ready to lend further policy support if need be. In other words, though the Fed is now on hold, it retains an “easing bias”.
In other news, Germany managed to avoid a technical recession last week, with Q3 GDP eking out a small 0.1% gain. China’s monthly “data dump”, however, revealed the economy continues to slow, with modestly weaker than expected results for industrial production, retail sales and fixed investment. So clearly, China wants a trade deal too!
As regards this week, there’s little in the way of major data apart from a range of manufacturing surveys for the US, Japan and Europe on Friday. Somewhat encouragingly, these may well show further tentative signs of stabilisation – after a year-long slowdown – even before we get the trade deal. Otherwise, focus is likely to remain on any signs of progress – or lack thereof – in the trade talks. There’s also a Presidential impeachment hearing going on, but markets seem uninterested – even if Trump is impeached – given there’s still a low risk Republican Senator’s would vote to remove him from office.
Local economic news last week was mainly disappointing, with only a small bounce higher in the NAB index of business conditions, persistent weak wages growth, and the first fall in employment for three years. The unemployment rate also edged back up to 5.3%, with my view that it’s likely to reach 5.75% by mid-2020.
This leaves the RBA still in play, with a further rate cut next month not out of the question – though my base case remains that the RBA will save its ammunition and fire its last conventional bullet next February. It now also seems likely the RBA will engage in some form of “quantitative easing” or QE next year, which is likely to at least entail buying up some federal government bonds, and possibly State government and corporate bonds also.
To my mind, the main reason for QE is to avoid the potentially confidence sapping perception next year that the RBA has run out of policy options, once it hits a lower bound for the cash rate of around 0.5%. But as we’ve seen to date, extra-ordinary policy moves by the RBA appear to be unnerving business and consumer sentiment as much as supporting it – and the impact of QE may be no different. Given QE, however, along with a likely still firm US economy and weaker iron-ore prices – I now anticipate the $A could drop to US62c later next year.
Meanwhile, the Federal Government is being dragged kicking and screaming into a bring forward of its remaining income tax cuts – which I now expect will be a feature of the May Federal budget, assuming local economic conditions fail to improve all that much in coming months.
As regard the equity market, the S&P/ASX 200 has so far failed to reach new record highs – as has been achieved by America’s S&P 500 Index. Note, however, this partly reflects sector specific issues among our large caps, such as RBA-induced margin squeeze for our banks, and weak iron-ore prices affecting our miners. When the top twenty companies are stripped out – as is possible with our EX20 ETF – the local market is, in fact, also at record highs!
There’s little locally to focus on datawise this week, though there may be interest to see how seriously the RBA Board is already discussing QE options – when minutes from its meeting this month are released tomorrow.
Have a Great Week!
Author, columnist, investment strategist and macro-economist. Previous roles at Federal Treasury, OECD, Macquarie Bank and AFR. I develop economic insights and portfolio construction strategies for BetaShares' retail and adviser clients.