Every working day I do a finance report on Sydney’s 2GB, Brisbane’s 4BC and Canberra’s 2CC with host Chris Smith, where I look at the most important economic or market-moving issue of the day. Yesterday, however, I was only concerned about a future fact and that was the US jobs report.
I told Chris if we got a bad employment stat that Wall Street could start really believing a recession is just around the corner and things could get pretty ugly for us here in Australia.
Imagine adding a US recession and stock market crash to the local falling house prices scenario, a low wage rise economy, a pending election and the likelihood of a Labor Government that has shown itself to be pretty unsupportive of big business and investors.
This story is not my kind of story!
But relax, the Yanks haven’t let us down in March, with the US economy creating a whopping 196,000 jobs, which beat the optimistic guesses of economists who were expecting 175,000 new jobs.
You might have forgotten this but February only brought 20,000 jobs. And while it was revised higher to 33,000, these low numbers made a doomsday merchant’s day. This was screaming the USA’s boom and bull market was heading towards recession and an overdue bear market. However these new figures have put the bears back in their caves for the moment.
This pushed Treasury yields up and the inverted yield curve would now be flattening out and could even have a near positive inclination. That said, there are still concerns about worst reading on the US services sector, which registered the lowest number since August 2017.
The ISM non-manufacturing index dropped 3.6 points to 56.1 in February, which was more than economists were predicting but any number over 50 says the sector is still expanding. So it’s not a disastrous drama. Anyway February is so cold in the US that the economic data can be scary at times.
That said, the US economy got a huge shot in the arm from the Trump tax cuts and some of this growth surge has to be dissipating. And it explains why President Trump told reporters after the jobs report that: “I think they [the Fed] should drop rates and get rid of quantitative tightening. You would see a rocket ship. Despite that we’re doing very well.”
Helping the US stocks fly higher has been trade deal news. On this subject, the President on Thursday said progress on making a deal was good and that “we’ll know over the next four weeks.” This was reinforced by the official state news agency Xinhua, which quoted the Chinese Vice Premier, Liu He, who talked about a “new consensus” being reached on the text of a trade agreement.
This news should help the local stock market next week. It needs help, with a 51.5 point fall in the S&P/ASX 200 Index on Friday leaving the market measure a measly 0.6 of a point higher for the week. This should have been a much better week, with good Chinese economic data and better Purchasing Manager Index numbers around the world suggesting that stimulus policies around the globe are showing positive signs.
Experts think the market was worried about the US-China trade deal and the US jobs report but as often is the case, the market was too negative. That said, I think the Budget has put the election into everyone’s sights and polls that say Bill Shorten is poised to move his things into The Lodge aren’t a big plus for financial and property markets.
Of course, Bill’s promises of bigger tax cuts will help the economy but the money has to come from somewhere so banks, miners and other big end of town companies linked to the stock market, along with SMSF retirees, are bound to feel the heat of a new PM in town!
Away from the Budget, the important market stories of the week were:
- Iron ore beat the $US90 a tonne mark with BHP and Rio up about 2% for the week bur Fortescue put on 9.4%.
- Automotive Holdings rose 22.9% after a takeover offer from AP Eagers late in the week. (See my final comment below.)
- Healius got a boost from the Budget changes, up 10.6% for the week.
- Local economic data picked up, with retail, building approvals, consumer confidence and business condition readings all giving reason to remain in the optimist’s camp. (see “What I liked” below)
- The RBA acknowledged weak December quarter growth particularly in consumer spending, which could be an early sign that a rate cut is becoming more possible. I think they will want to see the March GDP number. The tax cuts news this week could also be seen as a better substitute for a rate cut.
What I liked
- The Budget tax cuts and Bill’s bigger cuts are all pluses for economic growth, profits and the overall index, though some companies and investors will lose under Labor.
- Retail trade rose by 0.8% in February. And the more consistent grouping of ‘larger retailers and chain stores’ showed that sales rose by 1.4% in the month.
- The NAB business conditions index rose from +4.2 points to +7.0 points in March, above the long-term average of +5.9 points. Business confidence didn’t follow suit. (See below)
- The weekly ANZ-Roy Morgan consumer confidence rating rose by 2.6% – the biggest increase in 7½ months – to 114.7 points. Consumer sentiment is above both the average of 114.3 points held since 2014 and the longer term average of 113.1 points since 1990.
- Council approvals to build new homes rose by 19.1% (consensus: -1.8%) in February to be down by 12.5% over the year. But this latter number is worsened by bigger drops last year.
- The Australian Industry Group Australian Performance of Manufacturing Index fell by 3.0 points to 51.0 points in March. The ‘final’ CBA Manufacturing Purchasing Managers’ Index (PMI) declined by 0.9 points to 52 points. Any reading over 50 indicates expansion.
- The trade surplus rose from $4.35 billion to a record $4.80 billion in February. The annual trade surplus with China hit record highs, as did annual exports and imports with the country.
- China’s Caixin/Markit Manufacturing Purchasing Managers’ Index expanded at the strongest pace in eight months, rising to 50.8 from 49.9 in February.
- The ISM manufacturing index rose in the US from 54.2 to 55.3 in March (forecast 54.5).
- New claims for unemployment insurance in the US fell by 10,000 to a 50-year low of 202,000 in the past week (forecast 216,000).
- The pan-European STOXX 600 index rose by 1% to its highest level in nearly eight months on Thursday. Sentiment was boosted by renewed hopes for an imminent US-China trade deal and better-than-expected February Eurozone retail sales data. The German Dax rose for a fifth consecutive session, up by 1.7%. The UK FTSE was higher by 0.4% after Britain’s opposition Labour Party said that it had held “constructive” Brexit talks with British Prime Minister Theresa May.
What I didn’t like
- The Australian Industry Group (AiG) Performance of Services Index (PSI) rose by 0.3 points to 44.8 points in March, remaining near 4-year lows. Still, a reading below 50 indicates contraction of services activity.
- The ‘final’ CBA/Markit Services Purchasing Managers’ Index (PMI) rose by 0.6 points to 49.3 points in March.
- The NAB business confidence index fell from +1.8 points to -0.4 points in March – a 5½-year low and below the long-term average of +5.8 points.
- In trend terms, Queensland building approvals fell by 35.3% over the year to February – the weakest growth rate in a decade. (The falls here were much earlier in the year, so you have to be careful with annual numbers.)
- In March, 99,442 new vehicles were sold, down by 7.1% over the year. In the 12 months to March, sales totalled 1,130,111 units, down 5.9% on a year ago and the biggest annual decline in nine years.
- Consumer inflation expectations over the next two years fell from 4.2% to 3.6% last week – the lowest level since records began in October 2011.
- The CoreLogic Home Value Index of national home prices fell by 0.6% in March – the smallest decline since October – to be down 6.9% over the year. Prices fell in all capital cities except Hobart (up 0.6%) and Canberra (flat). Regional prices fell by 0.4%. (I don’t like these consistent falls but I did like the fact we saw the smallest fall in home prices since October. Let’s hope a new slower falling trend takes over.)
- Data showed Eurozone manufacturing at 6-year lows.
- The basic resources index fell by 1.3% after German industrial orders fell in February.
Our inaugural Budget Brekkie
On Wednesday, we held our first Post Budget Breakfast at the Hyatt Regency in Sydney. We only decided to do it five weeks ago and over 300 guests showed up to an event sponsored by Maserati. Apart from being a great morning where Paul Rickard and myself dissected the Budget and gave our analysis, I interviewed (table by table) some of the business leaders and owners who attended to get a business reaction to the Budget. Paul and I looked at the market implications and pointed out that Automotive Holdings and Healius were two companies that would be helped by the Treasurer’s promises so AHG’s 22% spike late in the week on a takeover offer and Healius’s bounce on the Budget changes were nice pay-offs for anyone who attended and invested accordingly.
Next year we’ll aim for a 1,000 guests and it would be great if you could come along if you weren’t there this time!
The Week in Review:
- Should you become more defensive [1] and start stocking up on recession-proof stocks that fall but not dramatically in a GFC-style event and, along the way, keep paying OK dividends?
- In his latest review of our model portfolios [2], Paul Rickard noted that a very strong first quarter has resulted in double digit gains for our portfolios.
- Charlie Aitken [3] wrote that US-listed Estée Lauder is benefiting from the powerful combination of beauty, e-commerce and social media, and their exposure to the most profitable pockets of the beauty category should drive earnings growth for years to come.
- Julia Lee [4] looked at which stocks you should avoid in a downturn and which sectors perform better, along with her asset allocation & strategy tips.
- A better proposition to going defensive is to choose “recession-proof” stocks. Is this a mythical status? James Dunn [5] looked at 2 recession resistant candidates and 4 that thrive during one.
- Tony Featherstone follows the IPO market closely and believes that small-cap IPOs can be dumped for no good reason and are far better value when the market forgets about them. Here is such an example [6].
- Our Hot Stock [7] of the week from CMC Markets’ Chief Market Strategist, Michael McCarthy, was Super Retail Group (SUL).
- Total downgrades for individual ASX-listed entities continued to outnumber upgrades in the first Buy, Hold, Sell – What the Brokers Say [8] of the week, while there were an equal number of upgrades and downgrades in the second edition [9].
- In Questions of the Week [10], Paul Rickard and Graeme Colley answered readers queries about investing for the long term, whether the ALP will change the super caps immediately, recession fears and holding too many bank shares.
Top Stocks – how they fared: 
What moved the market?
- Josh Frydenberg delivered his first budget with a $7.1 billion surplus forecasted for 2019-20.
- The United States and China are edging closer to reaching a trade deal according to reports.
- Britain is set to leave the European Union on April 12 if a further delay is not sought by the UK or granted by the EU.
The Week Ahead:
Australia
Tuesday April 9 – Weekly consumer sentiment
Tuesday April 9 – Lending (February)
Wednesday April 10 – Consumer confidence (April)
Wednesday April 10 – Speech by Reserve Bank official
Wednesday April 10 – Dwelling starts (December quarter)
Thursday April 11 – Overseas arrivals/departures (February)
Thursday April 11 – Speech by Reserve Bank official
Friday April 12 – Credit & debit card lending (February)
Friday April 12 – Financial Stability Review
Overseas
Monday April 8 – US Factory orders (February)
Tuesday April 9 – US NFIB Business Optimism (March)
Tuesday April 9 – US JOLTS job openings (February)
Wednesday April 10 – US Consumer Price Index (March)
Wednesday April 10 – US Monthly Budget (March)
Wednesday April 10 – US Federal Open Market Committee minutes
Thursday April 11 – US Producer prices (March)
Thursday April 11 – China inflation (March)
Friday April 12 – China Trade (March)
Friday April 12 – US Export/import prices (March)
Friday April 12 – US Consumer sentiment (April, prelim)
Food for thought:
“It’s clearly a budget. It’s got a lot of numbers in it.” – George W. Bush
Stocks shorted:
ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.
Chart of the week:
Following the release of the Federal Budget on Tuesday night, CommSec published this chart showing previous estimates of the 2018/19 budget deficit since mid-2015:
Source: Federal Treasury, CommSec
Top 5 most clicked:
- Should recession fears prompt you to dump growth stocks? [1] – Peter Switzer
- 2 resistors and 4 stocks that thrive in a recession [5] – James Dunn
- My sector, asset allocation & stock tips in a downturn [4] – Julia Lee
- Buy, Hold, Sell – What the Brokers Say [9] – Rudi Filapek-Vandyck
- Questions of the Week [10] – Paul Rickard
Recent Switzer Reports:
Monday 01 April: Our recession resistant stock tips [11]
Thursday 04 April: Beauty & small cap IPOs [12]
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.