Weekly Market & Currency Developments – From Our Bankers

Chinese export growth hits 8-month high

China international trade

– China trade: China’s international trade surplus rose by US$2.31 billion to US$34.01 billion (forecast: US$35 billion) in October.

– Exports/imports: Over the year to October, exports rose by 15.6 percent (forecast: +11.0 percent) and imports increased by 21.4 percent (forecast: +14.0 percent). Imports have grown by the most since July. And annual export growth is the highest in eight months.

– Aussie imports: China’s imports from Australia rose by 6.1 percent to US$8.5 billion in October. The Chinese data have implications for the currency markets and therefore exporters and importers.

What does it all mean?

– The US midterm elections have come and gone. But the main global policy risks for investors remain, including escalating US-China trade tensions, rising US interest rates and slowing global growth. Of course the first and last issues are interrelated with tariffs slowing trade volumes amid falling new export orders in Europe, in particular.

– The US midterm elections served to highlight that the US electorate is polarised on the issue of trade protectionism. Some US corporates, namely Ford and Harley Davidson, have communicated weaker sales and profit results in the September quarter, citing the impact of tariffs on rising input costs and falling demand. But President Trump will be emboldened by solid poll results among farmers in rural areas of North Dakota, Indiana, and Missouri. In any case, the President may not even need Congress to double-down on his trade policies with some Democrats openly supportive of the measures.

– Meanwhile, in China, Shanghai recently hosted the International Import Expo, with local participants showcasing the country’s prowess as a global leader in international commerce. President Xi Jinping said the expo “demonstrates China’s consistent position of supporting the multilateral trading system and promoting free trade. It is a concrete action taken by China to advance an open world economy and support economic globalisation.” President Xi also pledged to punish intellectual property theft, lower import tariffs and open up various sectors of the economy, such as education and culture.

– Talk is cheap, as evidenced by recent data releases in China. The Chinese economy grew at an annual rate of 6.5 percent in the September quarter – its weakest pace of growth in almost a decade. And leading indicators of economic activity are losing momentum. In fact, China’sofficial manufacturing gauge expanded at its weakest pace in over two years in October – the first full month that US tariffs went into full effect.

– But China’s international trade data continues to defy US tariffs. In October, the trade surplus jumped to its highest level since June. And over the year to October, imports have grown by the most since July. Annual export growth is the highest in eight months. Clearly, fiscal policy measures focused on tax cuts, export rebates, bond issuance for infrastructure spending and social housing investment are providing some support for the Chinese economy. And the Renminbi’s 6.5 percent decline against the greenback so far this year is assisting exporters. There also may be some front-loading activities and database effects at play. But will this piecemeal approach be enough to nurse the economy through to year end and meet policymaker’s 6percentent annual GDP growth target?

– The good news from an Aussie perspective is that we are continuing to weather the storm. In fact, Australia’s external trade balance is improving, having recorded the largest surplus in 19 months and a positive trade balance in every single month this year. Australia continues to set records with its top trading partner, China. Both annual exports and imports climbed to fresh record highs in September.

What do the figures show?

China’s international trade surplus rose by US$2.31 billion to US$34.01 billion (forecast: US$35 billion) in October – the highest level since June.

Over the year to October, exports rose by 15.6 per cent (forecast: +11.0 per cent) and imports increased by 21.4 per cent (forecast: +14.0 per cent).

What is the importance of the economic data?

China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. QuarterlyGDP data is released around the 19th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. China is Australia’s largest trading partner and changes in the Chinese economy have major implications for the Aussie economy.

What are the implications for interest rates and investors?

– It is hoped that US President Trump and Chinese counterpart President Xi stick to their word and thrash out a resolution to the ongoing trade dispute when they meet at the G20 Summit in Argentina on November 30- December 1.

– US and Chinese tariffs are contributing to a self-defeating slowing in broader global growth. Tariffs increase the cost of production, result in higher taxes on consumers, disrupt supply chains and sap confidence from consumers and businesses, who in turn may reduce spending and investment. And profits are being reduced in corporate America, crimping business investment as evidenced by the weak reading in the September quarter GDP report.

– In China, domestic producers are reporting that export orders at China’s biggest trade fair, the Canton Fair, have fallen sharply. And US firms operating in Southern China are threatening to leave or delay investment.

– Australia’s dependence on China for two-way trade threatens our improving trade income. We could get caught in the crosshairs of an escalating stoush between our largest trade partner and our largest diplomatic ally. Not ideal.

– That said, China’s insatiable demand for Australia’s natural resources services remains strong. Aussie exporters are key beneficiaries of a weaker Aussie dollar, thanks mainly to increasing interest rate differentials with the US. And rising iron ore, LNG and coal prices are boosting Australia’s fiscal position.

– Experts do not expect a change in Australian interest rates until at least November 2019.

Best US midterm election sharemarket rally in 36 years

Sharemarket trends

– Global sharemarkets lift: Shares in the US and Europe lifted by around 1-3 per cent on Wednesday.Global shares: What happened and what does it mean?

– Sharemarkets across Europe and the US rallied on Wednesday. The primary catalyst was the US midterm election results, which were broadly in-line with consensus expectations. The Democrats regained control of the US House of Representatives after eight years, while the Republicans retained leadership of the US Senate.

– Financial markets don’t like political uncertainty and while a divided US Congress is likely to lead to legislative gridlock on Capitol Hill, sentiment was boosted by conciliatory comments made by US President Donald Trump after the election result. He signalled bi-partisan co-operation with the Democrats on policy initiatives that could support economic growth. President Trump said, “The Democrats will come to us with a plan for infrastructure, a plan for health care, a plan for whatever they’re looking at and we’ll negotiate.”

– At the close of US trade, the Dow Jones index was up by 545 points or 2.1 per cent and the S&P500 index was up by 2.1 per cent – both posting their largest post-US midterm election gains since the near 4 per cent lift in 1982. And the technology-laden Nasdaq index finished up 194 points or 2.6 per cent.

– The S&P technology sector finished up by 2.9 per cent as the Trump Administration’s probe into alleged anti-trust violations by Amazon, Facebook and Google parent, Alphabet, could be put on the ‘backburner’ in favour of other policy priorities. Amazon shares rose by 6.9 per cent.

–  Shares of US drugmakers and healthcare insurers also rallied by 2.9 per cent on Wednesday. A split US Congress is unlikely to significantly cut government healthcare programs or reduce drug prices in the world’s biggest and most profitable market. Shames of Humana, UnitedHealth and Anthem shares all hit record highs.

–  And Vulcan Materials’ shares rose by 4.9 per cent on hopes of an infrastructure plan, given broad-based support from both parties historically.

–  In Europe, sharemarkets rose on Wednesday due to solid earnings results and a rally by Spanish banks’ BBVA, Caixabank, Sabadell, Santander and Bankia by 1.8-4.1 per cent on a favourable tax ruling. Shares of Scout24, Ahold and Vestas rose by 6.2-7.6 per cent after strong earnings updates. The pan-European STOXX600 index rose by 1.1 per cent. The German Dax lifted by 0.8 per cent and the UK FTSE index increased by 1.1 per cent. In London trade, shares of Rio Tinto rose by 1.6 per cent and BHP rose by 1.5 per cent.

–  The more positive risk environment saw the US dollar weaken in European and Asian trading with the Aussie dollar rising from lows near US72.38 cents to highs near US72.99 cents and is currently trading near US72.79 cents. The gold futures price rose by US$2.40 an ounce or 0.2 per cent to $1,228.70 an ounce and US Treasury 10-year yields were flat at 3.23 per cent at the close of US trade.

– Aussie shares have opened positively with the S&P/ASX SPI 200 futures contract up by around 40 points or 0.7 per cent.

–  Attention will now turn to the US Federal Reserve interest rate decision on Thursday (US time). And the US-China trade war will return to focus with Chinese trade data scheduled for release this afternoon.

What are the implications for investors?

–  With the US midterm elections out of the way, investors can re-focus on their bigger concerns: rising US interest rates, US-China trade tensions and slowing global growth.

–  There continues to be a number of challenges for both investors and policymakers. The US Federal
Reserve will try to avoid policy mistakes in
determining the timing of rate hikes and the level of interest rates. Investors need to ascertain whether their portfolios are positioned appropriately for heightened market volatility, while preserving their capital.

–  We see the potential for one further US rate hike in December with two further hikes in 2019. Analysts largely assume that the US Federal Reserve will “pause” in its rate hiking path when the federal funds rate is near a“neutral” rate of interest of 3 per cent.

–  The US economy is operating at or near “full capacity” and the US$1.5 trillion corporate tax cut plan together with increased defence and health care spending have lifted the US budget deficit to its highest level in six years at US$779 billion in fiscal year 2018. Government debt has also surged to a record-high US$21 trillion. Both limit theUS government’s spending ‘firepower’ should the US economy lose momentum, as expected, over the next 24 months.

–  A divided US Congress likely dims the prospect of further proposed personal tax cuts and broader fiscal stimulus by the Trump Administration, which could be a good thing given the US is already growing strongly with full employment and inflation is already at the US Federal Reserve’s inflation goal of 2 per cent. The overheating US labour market, where average annual earnings at 3.1 per cent (in October), is encouraging policymakers to lift interest rates. Perhaps more fiscal restraint will cap US dollar strength and rising US Treasury yields, enabling the Fed to be less aggressive in its approach to tightening monetary policy? That would be good news for US homeowners and businesses contending with rising borrowing costs. And the sharemarket would be supported.

–  Determining how the US-China trade dispute will be resolved remains a ‘wildcard’ for investors. Some Democrats are supportive of President Trump’s protectionist measures. The US Commerce Department is expected to impose final anti-dumping and anti-subsidies duties on Chinese aluminium sheet products on Wednesday. So alleyes will be on President’s Trump and Xi when they are expected to meet in Argentina on November 30.

–  Experts don’t expect a change in Australian interest rates until at least late 2019. But it will be important to watch job figures, wages and prices to try and glean when the Reserve Bank will come off the interest rate sidelines.

Investor Signposts: Week Beginning November 11 2018

Australia: Job market in spotlight

– The job market dominates proceedings in the coming week. The wage price index is released on Wednesday while the October monthly data on the labour force – employment and unemployment – is issued on Thursday.

– The week kicks off on Monday in Australia when the Reserve Bank releases September data on credit and debit card lending. Unfortunately, there have been revisions to data, making it more difficult to uncover trends. But the evidence still seems to show that credit and debit cards are being actively used although account holders are keen to pay off outstanding credit card debt by the due date.

On Tuesday, the National Australia Bank releases the October business survey. In September the index of business confidence lifted by 6.2 points while business conditions rose just under 1 point to a 3-month high. Notably, the employment index posted a solid gain in the month.

– The regular weekly reading on consumer confidence is published by ANZ and Roy Morgan also on Tuesday. The key issues at present are petrol and home prices together with the volatility on the sharemarket. Overall, Aussie consumers seem to be weathering the choppy conditions.

Also released on Tuesday is the broader array of lending figures. The data on home loans is provided, but together with business, lease and personal loans.

– In August, total new lending commitments (housing, personal, commercial and lease finance) fell by 1.5 per cent to $69.3 billion. And commitments were down by 4.2 per cent on the year. In trend terms, lending rose for the fourth month, up by 0.4 per cent.

Of note, loans to buy new or used cars fell to 25-month lows in rolling annual terms in August.

On Wednesday, the main gauge of wages in Australia – the wage price index – is released. In the June quarter, wages rose by 0.6 per cent, lifting the annual rate from 2.0 per cent to 2.1 per cent. And including bonuses, wages were up 2.5 per cent on the year.

– Overall we expect the tighter job market to show up in the September quarter with wages up 0.7 per cent in the quarter to stand 2.4 per cent higher for the year.

Also on Wednesday Westpac and the Melbourne Institute release the November monthly reading on consumer confidence. This indicator is more of a check on the weekly consumer confidence survey.

On Thursday, the October labour force data is released by the Australian Bureau of Statistics (ABS). In September, jobs rose by just 5,600 but the unemployment rate hit a 6-year low of 5.0 per cent. Based on an array of solid survey evidence, we tip a 25,000 lift in jobs in October, leaving the jobless rate unchanged at 5.0 per cent.

Also on Thursday Reserve Bank Deputy Governor Guy Debelle delivers a speech.

On Friday the ABS releases the State Accounts – data that reveals how fast the state and territory economies grew over the past financial year.

Activity data in focus in the US and China

–  In the US and China in the coming week, the ‘top shelf’ indicators of retail sales and industrial production are released.

–  The week kicks off on Monday in China, with the Association of Automobile Manufacturers scheduled to release October sales figures. Vehicle sales are down almost 12 per cent on a year ago.

–  And on Tuesday in China, the scheduled data are the lending and money supply indicators for October. Loans are growing at a solid 13.2 per cent annual rate.

– In the US, the week begins on Tuesday. The National Federation of Independent Business releases the Small Business Optimism index. In September the index fell from a record high of 108.8 to 107.9. The usual weekly data on chain store sales is also released on Tuesday with the October monthly federal budget figures.

–  Also on Wednesday in the US, the October inflation data – the Consumer Price Index – will be issued. Inflation is creeping, not leaping higher. In fact the annual core rate (excludes food and energy) may have remained at 2.2 per cent in the month.

–  On Wednesday in China and on Thursday in the US, retail sales data for October will be issued. There is also additional data in China in the shape of industrial production and investment figures. In the US, retail sales is growing at a 4.7 per cent annual rate. In China, sales growth is almost double the US with sales up 9.2 per cent over the past year.

–  Also on Thursday in the US is data on export and import prices and two key manufacturing surveys – the Empire State and Philadelphia Federal Reserve surveys. The usual weekly data on claims for unemployment insurance is also expected.

–  Data on home prices is slated for release in China on Thursday.

–  On Friday in the US, data on industrial production is issued together with capital flows data. Economists expect a 0.2 per cent lift in October production.

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