Subdued optimism may sound like an oxymoron, but it is where we find ourselves this month. Despite the ongoing Brexit impasse and an escalation in the China/US trade war, the global economy and our own continues to deliver levels of growth that are turning key economic indicators more positive.
The most important and pervasive of these in terms of impact is employment. Unemployment in most of the world’s largest economies is falling. In the USA in April unemployment fell to 3.6% (down from 3.8% in March) falling to its lowest level since 1969. This is the lowest unemployment level in 50 years in the world’s largest economy. This statistic deserved more attention than it received. In Australia unemployment stood at 5% for April, the same as March and along with underemployment still appears to be firmly trending downwards. More importantly the tightening labour market is finally starting to translate into real wage growth in the USA, Europe, Japan and Australia. The Australian Bureau of Statistics wage price growth index suggests the growth in real wages bottomed in 2018 after almost a decade of decline. (see chart 2)
The USA continues to surprise on the upside. Federal Reserve chairman Jerome Powell in his latest monthly address on May 1st stated ‘the committee also believes that solid underlying fundamentals are supporting the economy, including accommodative financial conditions, high employment and job growth, rising wages, and strong consumer and business sentiment.’ One of the most commonly quoted optimism polls the IBD/TIPP economic optimism gauge rose from 54.2 to 58.6 in May against a forecast rise to 54.5 (post the Fed committee meeting) and the latest Job Openings and Labor Turnover survey (JOLTS)by the US Bureau of Labor for March also rose ahead of forecasts.
At its monthly meeting on May 7th the Reserve Bank of Australia left the cash rate on hold at 1.5%. Rates have now been set at historically low levels for 33 months. Governor of the Reserve bank, Phillip Lowe, stated the board did not see any need to change the current policy stance in the wake of reasonable global and domestic growth outlook and a strengthening labour market. Inflation was also lower than anticipated by the RBA for the March quarter but was not thought to reflect anything warranting a stimulatory policy change. Again, the labour market was cited as being the critical factor in any future change in policy. Continued strong growth in exports, improving commodity prices and terms of trade are other positive trends supporting national income growth.
Three of the four major banks reported their interim results this month and the most notable stock market news was the decision by NAB to cut its dividend and ANZ and Westpac to keep their interim dividends on hold. Several key trends for the banks have now turned negative. Rising remediation costs in the wake of the royal commission, slowing housing loan growth, rising impairment provisions (albeit from historically low levels) and restructuring costs were key themes in the latest results.
After spending over two decades building integrated and diversified financial services models the banks are for the most part exiting non-core banking operations across insurance, funds management and financial advice. Restructuring, rationalising, downsizing, consolidation and cost out is now the mantra for the Australian banking sector. The prospects for both earnings and dividend growth appear limited in the short to medium term. On a more positive note strong balance sheets and major cost out programs should enable banks to continue to deliver relatively stable income streams to shareholders.
Domestic and global share markets have continued their recovery from the selloff in the December quarter 2018 and continue to grind higher. First quarter reporting season in the USA is coming to an end with the majority of companies reporting earnings and revenue growth above consensus estimates. The US market and particularly the NASDAQ/technology sector remains the most overvalued globally and is probably the most vulnerable to external risks such as an escalation in the trade war with China and/or a wage push inflation spike. Donald Trump’s latest threat on May 4th to lift tariffs on US$200 billion worth of Chinese imports from 10% to 25% and possibly impose a 25 percent tariff on a further $325 billion of Chinese imports is again unsettling markets this month and seeing some retreat from recent record highs. That said the US market is trading on a forward earnings multiple of 16.8 times. While above the long-term average of about 14-15 times, valuations could not be considered excessive given current economic conditions and forecasts. As always sentiment and confidence will be key – markets are not always rational.
We head to the polling booths next week with both parties falling well short on both the policy and leadership front. No new polices of specific interest have been announced since last month but those announced to date are repeated below.
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Sources: Commbank Global Markets Research, RBA, Morningstar.