No matter the slings and arrows being thrown at stocks at the moment, the global rally continues.
Janet Yellen’s agreement with her hawkish colleagues from the Fed that rates in the US are likely to increase again soon didn’t phase the bulls. No doubt a big part of that was the release of the latest update for US first quarter growth which was stronger than initially estimated.
That helped the US dollar push higher but given that crude oil, copper and commodities more broadly (but not gold) rallied suggests sentiment — and maybe the commodity cycle — has turned.
With the US and UK out for holidays Monday, Asian and Australian markets will be left to their own devices for the first two days of the week. Trade is likely to be positive — especially given the ASX200’s close Friday was the first above 5400 since August 2015.
It’s a data deluge this week both here in Australia and offshore. The release of GDP is the local highlight. Globally, traders will be focussed on the plethora of PMIs, an ECB meeting and US non-farm payrolls Friday.
Janet Yellen signalled the Fed is going to raise rates — soon: Speaking at Harvard on Friday Fed chair Janet Yellen signalled that rates in the US will be heading higher soon. “The economy is continuing to improve,” and “inflation will move up over the next couple of years to our 2 percent objective,” Yellen said in a conversation with Harvard economics professor Gregory Mankiw.
That, she said, means “It’s appropriate, and I’ve said this in the past, for the Fed to gradually and cautiously increase our overnight interest rate over time…probably in the coming months such a move would be appropriate.”
Clearly these comments do not lock in June or even July rate increases. Yet to me there is an unequivocal signal to markets that Yellen, like her peers, believes the US economy both needs and can cope with higher rates. That’s not universally accepted though with two of my favourite market watchers, Joe LaVorgna of Deutsche and Marc Chandler of Brown Brothers Harriman seemingly at odds.
But not all Fed officials are equal. Her March speech in NYC demonstrated the power of the Chair. https://t.co/HGf74FH8PA
— Marc Chandler (@marcmakingsense) May 27, 2016
I’m with Chandler — Yellen is on board this time.
But a Fed tightening doesn’t mean stocks will crash: Could the Fed be about to pull off what just a few short months ago would have been almost unimaginable to most market watchers and tighten rates without sending stocks cascading lower? It’s looking like it could be a real possibility.
On Friday, after Yellen’s firm message, the S&P 500 rose 0.43% to close at 2099, the Dow was up 0.25% and the Nasdaq rose 0.65%. The close of 2099 leaves the S&P 500 just 36 points, 1.75%, below the all-time high of 2135. That’s remarkable when you consider the pervading bearishness that seems to have been prevalent in markets in recent months. It tells you something about the strength of the underlying stock market structure which has been able to hold up even as money has continued to rush from stocks into bonds and cash.
AS Andrew Adams, market strategist at Raymond James, pointed out last week all this cash could be the match that lights an “explosion higher” for stocks.
2135 is going to be a formidable level for US stocks. But if the market continues to defy the rush to cash and market pessimism, at some point there is a real chance that investors have no choice than to get sucked into the rally and put their money back to work.
The ASX 200’s close above 5400 on Friday could be the first sign of a change in global sentiment.
Australian Calendar — (courtesy of NAB Economics, our emphasis)
It is going to be a huge week in Australia with the release of first quarter GDP the highlight Wednesday. Forecasts are for a gain of 0.6% to 0.8% and a deceleration in growth from last quarter’s 3% annual rate.
The folks in the NAB’s economics team reckon growth will print 0.8%, up from Q4 2015’s 0.6% quarterly growth rate but down from the 3% rate in the year to the end of December 2015.
Either side of the GDP release, there is a raft of other important data “monthly building approvals (Tuesday) and retail sales/ trade on Thursday. Quarterly growth partials start Monday with inventories and company profits, and on Tuesday net exports and government spending. Also due: a host of second tier data including HIA new home sales Monday, RBA credit Tuesday, monthly house prices/ commodity prices, NAB’s Online retail sales Wednesday and the AIG PMI data set,”the NAB wrote.
Potentially strong GDP growth to mask domestic weakness: Net exports, that’s the contribution to growth that comes from the difference between what we sell offshore (exports) compared to what we buy from offshore (imports), are expected to drive growth higher for Q1. The ANZ said in its GDP preview that “net exports will add a substantial 1.1ppts to growth in Q1 as new supply comes on stream”.
That implies the rest of the economy is going backwards as Paul Brennan, and his economics team from Citibank Australia suggested in their Australi/NZ Economics weekly Friday. They expect growth of just 0.6% for the quarter and note “the Q1 quarterly print doesn’t have the weak base from one year ago with which to flatter the yearly growth rate. This is why even with a repeat of 0.6% quarterly growth, yearly GDP(A) growth to Q1 is forecast to ease from 3.0% to 2.6%”.
Citi says “demand growth is likely to be close to flat” and the details of growth will be “soft”. Like the ANZ, Citi’s economists say their growth forecasts are only where they are “because net-exports come to the rescue”.
Here’s their chart of expected contributions:
International Calendar (also courtesy NAB Market Economics)
US: After Monday’s Memorial Day holiday, main interest will be in Tuesday’s personal income, spending and PCE deflators report, the ISM Manufacturing on Wednesday and the big one, non-farm payrolls, rounding out the week with the ISM non-manufacturing also on Friday. Some other key data is due, including the Chicago PMI and the Fed Beige Book along with trade, factory orders and more Fed speakers towards the end of the week.
China: The largest focus will be Wednesday’s official PMIs and Caixin manufacturing PMI, followed by the Caixin services/composite PMIs on Friday.
Euro: Eurozone confidence surveys Monday along with OECD Economic Outlook, German CPI, Eurozone unemployment and CPI Tuesday, revised manufacturing PMIs Wednesday, ECB meeting Thursday, revised services/composite PMIs Friday.
UK: Spring Bank holiday on Monday, then manufacturing PMI and mortgage approvals Wednesday. Services/composite PMIs also on Friday.
Canada: Most focus on Tuesday’s GDPs with other second tier data due.
NZ: Tuesday’s ANZ business survey the scene setter with another global dairy auction. Wednesday is overseas trade indexes and Friday is building work release are relevant for Q1 GDP. Also building consents, credit, house price inflation and ANZ commodity prices.
Here’s the NAB’s excellent calendar of all the key data and events.