Economic Update – November 2019
by Infocus Author
Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.
US data shows strength
– US reporting season stronger than most expected
– US Fed cuts rate in another split decision
– RBA cuts rate to 0.75%
We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact us.
The Big Picture
The month of October was expected by many commentators to disappoint on a number of fronts: the US reporting season was expected to show weakness; the Brexit deadline of October 31st might produce a bad ‘no deal’ outcome; and the Australian economy was expected to deteriorate.
As it turned out, October witnessed a number of positive outcomes. Broker estimates of company earnings had been pared back but Q3 reporting season produced many strong upside surprises.
As a result, the S&P 500 performed strongly over October making a new all-time high.
Market activity was justified not by earnings simply beating lower expectations but the outlook for future earnings also improved. A few big tech companies’ stock prices fell sharply. The gloss has come off the so-called’ unicorns – companies that recently listed and rapidly became massive. Such a more considered view of such companies with little or no track record of profitability might help the future stability of the market.
US GDP growth also exceeded expectations for Q3. The initial estimate for the year to Q3 was 1.9% compared to the expected 1.6%. The Q2 result of 2.0% was only a fraction higher.
The start of October’s US labour force survey produced some mixed results. The unemployment rate fell to an almost 50-year low of 3.5% from 3.7% but wages growth was a little lower than expected at 2.9%. Only 136,000 new jobs were created but that number may have been tainted by strike activity. The 46,000 GM people on strike also makes it more difficult to interpret the November 1st data release.
The US Federal Reserve (“the Fed”) met at the end of October to consider its interest rate policy. A few weeks ago, there was an estimated probability of keeping rates on hold at about 25% (using the CME Fedwatch tool that constructs such probabilities from futures contracts). The day before the October 30th statement, that probability had fallen sharply to around 2.5% – which then fell to 0% just hours before the statement.
It was no surprise, therefore, that the Fed cut rates by 0.25% to a range of 1.50% to 1.75%. There was some concern how the Fed would handle future expectations. Chairman, Jay Powell, deftly soothed the market. He made it clear the cutting cycle has ended unless the economy materially deteriorates.
He also made it clear that rates will not rise (again) until inflation becomes a problem. The stock market reacted favourably.
At home, the RBA cut rates by 0.25% to 0.75% on the first Tuesday in October and signalled more cuts might follow. But our economic data that followed in October painted a rosier picture than the RBA has been painting. Retail sales came in at 0.4% for the month and our unemployment rate fell to 5.2% on solid jobs growth.
However, Australia CPI inflation continues to stay below the RBA target band of 2% to 3%. The latest headline reading was 1.7% and the RBA’s preferred core CPI was 1.6%.
The latest saga in the Brexit negotiations seems to be a three-month delay in the deadline and a UK general election on December 12th. The early polling suggests the Labour Party has little chance of victory largely owing to the unpopularity of its leader even among the parliamentary Labour MPs! What matters, therefore, is how the minor parties rally their troops on Brexit issues. At least the hard landing scenario now seems to be on the back burner.
The IMF cut its global growth forecast to 3.0% for 2019 (from 3.7% in 2018) but it forecasts a rebound to 3.4% in 2020. In the previous month the OECD downgraded its growth forecast to 2.9% for 2019.
We believe that relevant investment conditions are as good as, or slightly better than, previously reported so we feel that no change in strategy is warranted at this point.