Weekly Market Update (Issue 502) – 8th June 2018

8th June 2018, 11.00am

Firstly, a quick apology for my brief missive last week. I wouldn’t ordinarily be so quick, but I found myself on the hop with travel, and fortunately there wasn’t a huge amount to tell.

Since we are now getting the usual slew of monthly economic data out, its perhaps a terrific opportunity to offer a quick summary of how I see both the U.S and local economy, and how this view is driving our broader portfolio thoughts.

Quick U.S Economic Update – super strong, but inflation threats building

Early data out from the U.S for May points to ongoing strength.

Manufacturing and service sector data remains extremely strong, new orders continue to grow faster than inventories (excellent for production), and unsurprisingly, both business and consumer confidence remain up and around their highs since the early 2000’s.

As Trump tweeted this week (yawn), the US unemployment rate has indeed fallen to its equal lowest level since the late 1960’s at 3.8%, and job openings in the U.S have surged again year-to-date, rising by a staggering number of 1m to 6.7m.

More people are quitting their existing jobs, presumably for the prospect of better terms, than have done so since 2001.

There is definitely increasingly less slack in the U.S employment market as the job openings attest, and wages are slowly walking up, but as yet there have been no headline wage or inflation scares.

That might be just for now though.

The monthly small business optimism survey conducted by the U.S National Federation of Independent Business (NFIB) indicates respondents see compensation rates at their highest level since the survey begun in the early 1980’s and hiring intentions are only marginally below their highest level in 40 years too.

Echoing this, the ‘Job Openings Hard to Fill’ index is also at or around its highest level on record.

With new order momentum strong and businesses still hell-bent on hiring to fill demand, the potential is surely building for a concerted push higher in annualized wage growth.

Wages are the key concern for longer-term interest rates, but beyond this, other price pressures are building from rising commodity prices and interestingly too, from housing. Note that rental vacancy rates have been at or around 30-year lows for much of the past 2 years, putting potential upward pressure on housing costs.

It will be an interesting 3-6 months on the wage and inflation front, and it would seem likely to me that the risks remain of a surprise on the upside.

Interestingly next Tuesday night we get the May U.S inflation figures. We haven’t see an annualized reading above 2.8% since early 2012, but the risks are building that we see a 3%+ print in the coming months due to the issues I have cited above, but also due to the fact that this time last year inflation readings were at a notable low point, making the basis of comparison all the easier to surprise high.

I think we should all be on alert for some potential uptick in inflationary pressures in the US through the northern summer, and for that reason we still think it’s miles too early to be piling into bond proxy sectors such as infrastructure locally in Australia.

Clearly too, the threat of a spike higher in US treasury bonds on inflation concerns once again leaves equity markets vulnerable to a negative surprise.

Some food for thought.

Australian Economic Update – business economy is excellent, housing and construction is an emerging drag

Unlike the U.S, there isn’t much chance of a surprise uptick in inflation. Yes, employment is on the improve, and yes business confidence is excellent, but we still have significant slack in our labour market to unwind before wage pressures emerge.

This week we got confirmation that local manufacturing and construction sectors continue to grow nicely, and in fact, our services sector is showing its best momentum since pre-GFC (mid 2007). At a corporate level, there are grounds for continued optimism.

But the housing market, and forward construction indicators in apartments in particular are looking a little ropey.

We have made much of the likely negative impact the Royal Commission will have on liquidity provision for housing, and it is hard to dispute the impact is already being felt.

The national auction clearance rate fell to just shy of its lowest number since early 2013 – a significant date since this is when housing seemed to bottom as the RBA got serious about cutting local interest rates.

Unsurprisingly alongside this new softness in housing, Australian banks continued their malaise, reaching a new 6-year low against the ASX200.

We have tried to position portfolios to reflect this dichotomy in our economy, persisting with our perennial underweight in the major high street banks, and advocating for exposures to businesses leveraged to the economic strength, notably SEEK (SEK), APN Outdoor (APO), Downer (DOW), QUBE (QUB) and perhaps even Vocus (VOC) given the latter’s significant corporate telecommunications operations.

All of these shares have performed well for us, or at least are starting to do so.

To all of you who get one, have a great long weekend ahead!

Jono & Guy

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Australian Market Index

Friday 10am values

IndexChange%
All Ordinaries 6169 +45 +0.7% 
S&P / ASX 200 6057 +45 +0.7%
Property Trust Index 1399 -4 –0.3%
Utilities Index 7529 -266 –3.4%
Financials Index 5933 -42 –0.7%
Materials Index 12433 +384 +3.2%
Energy Index 11412 +140 +2.1%


Key Dates: Australian Companies

Mon June 11th PUBLIC HOLIDAY NSW & VIC
Tue June 12thN/A
Wed June 13th Div Ex Date – WBCPF, WBCPH
Thu June 14th Div Ex Date – NABPC, WBCPE
Fri June 15th Div Pay Date – CBAPC, CBAPD, CBAPE, CBAPF, CBAPG

International Market Index

Thursday Closing Values

IndexChange%
U.S. S&P 500 2770 +65 +2.4%
London’s FTSE 7704 +26 +0.3%
Japan Nikkei 22823 +623 +2.8%
Hang Seng 31513 +1044 +3.4%
China Shanghai 3109 +14 +0.5%

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Disclaimer: This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.

This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.

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