Switzer on Saturday

Let’s hope Donald doesn’t ruin it

Founder and Publisher of the Switzer Report
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Anyone who doubts that the Trump team isn’t sensitive to the market’s reaction to its trade tweets and about the course of negotiations between the US and China, received signals that should change their mind. And the messages that have gone out lately have so enthused Wall Street that even a disappointing jobs number didn’t bring stocks down.

Of course, the 130,000 jobs created in August was 20,000 short of what economists expected but it has increased the likelihood of the Fed living up to expectations that it will cut interest rates at its next meeting. On that subject, the central bank boss, Jerome Powell, would like the fact that while job creation slowed and unemployment was steady at 3.7%, wage rises picked up by 0.4% to be up 3.2% annually.

That’s important for the all-important consumer and it’s starting to make the US economy look more normal. As economies grow, normally wage rises start to kick in, which can slow down job creation. One day the economy might be able to stand a small interest rate rise or two, which a normal economy would be getting late into a bull market!

That said, the White House economics group wouldn’t have liked this week’s ISM manufacturing index, which fell from 51.2 to 49.1, the first decline in three years. Any number under 50 says the sector is contracting. This trade war wasn’t supposed to be bad for US factories.

On the positive messages from the Trump team, the President’s economic advisor, Larry Kudlow, went public overnight with this: “The phone call the night before last with Secretary Mnuchin and Lighthizer and Vice Premier Liu He went very well. That’s important.” (CNBC)

On the upcoming early October meeting between the trade warring parties, Kudlow said: “The deputies level [meeting] will continue in Washington later this month and from that deputies level meetings will come an agenda and an outline… – I think this is terribly important.”

At home this week, the big story was economic growth that came in at 0.5% for the June quarter, which brought the annual growth rate to a low 1.4%. But if we were in the US, they’d take that 0.5% number for the June quarter, multiply it by four, and say we had 2% growth annualized! In fact, our RBA takes the past six months of growth and multiplies it by two, which also annualizes to 2%.

Despite my upgrading of the number, Westpac’s Bill Evans thinks more rate cuts are coming. I think the RBA will give the economy one-two months before they move, especially with better trade talks on the boil.

On a related matter, a former Fed boss, Alan Greenspan, surprised many, saying he thinks the Yanks will see negative interest rates! I hope he’s wrong. A trade deal would be the best way to stop rates falling into negative territory.

Helping our market go higher was the “Deep Throat” on the trade war , the editor-in-chief of the Global Times out of Beijing, Hu Xiji, who thinks a deal is on the table. “There’s more possibility of a breakthrough between the two sides,” he said in a tweet Thursday.

This ‘tweet’ and the Trump tweets on the subject helped the S&P/ASX 200 close higher for the week at 6647.3, which was a nice 0.7% lift. “I think that we could be getting close to a deal,” said Greg Bundy of Federation Asset Management. “Trump has probably milked this for as long as he can.” (AFR)

The good news on trade talks saw the gold price and stocks fall, while growth assets and stocks, such as the banks and tech shares, went higher.

Western Areas rose 24.2% to $3.08, while the likes of Afterpay went from a low of $30.92 this week to end at $33.88, which shows the value of ending this trade war.

Hong Kong’s improved news helped but Boris Johnson and his Brexit drama has been a negative. And you might have missed this but yep, the Italians avoided another drama, forming yet another new government, which helped collective global positivity.

Meanwhile, ‘safe stocks’ that have been bought as so-called bond proxies, such as the Goodman Group, lost 5.8% over the week to end at $13.68. This gives us a clue that winners on trade-war-worrying months will become losers if a trade truce happens.

What I liked

  • The CoreLogic Home Value Index of national home prices rose by 0.77% in August – the biggest increase since April 2017. And capital city home prices rose by 1.01% – the biggest lift since March 2017. Sydney home prices lifted by 1.6% in August – the biggest increase since November 2016. And Melbourne home prices rose by 1.4% – the strongest monthly gain since April 2017.
  • Company operating profits rose for the eighth straight quarter, up by 4.5% in the June quarter. Profits were up 12.5% on the year. Mining profits were at record highs.
  • Wages & salaries (includes changes in wages and employment) rose by 1.4% in the June quarter to be up 4.7% on the year (decade average 3.6%).
  • Despite all the challenges out there, the RBA Governor Philip Lowe told us: “The outlook for the global economy remains reasonable…” (Love this guy’s measured optimism! Chip off the old block.)
  • The RBA left the cash rate at a record low of 1%. The Reserve Bank previously cut rates in both June and July, each time by 25 basis points or a quarter of a per cent.
  • The broadest measure of the trade accounts – the current account – was in surplus by $5.9 billion in the June quarter after a deficit of $1.1 billion was recorded in the March quarter. It was the first current account surplus recorded since June 1975.
  • The Australian Industry Group (AiG) Performance of Services Index (PSI) rose by 7.5 points to 51.4 points in August.
  • The ISM services index in the US rose from 53.7 to 56.4 in August (forecast 54).
  • The ADP survey in the US showed that 195,000 private sector jobs were created in August (forecast 149,000) – the fastest pace of job creation in four months.
  • US Factory orders rose by 1.4% in July (forecast +1%).
  • The Federal Reserve Beige Book reported that the US economy expanded at a modest pace through to the end of August. Manufacturing activity eased since the previous report.
  • Hong Kong leader Carrie Lam has withdrawn the contentious extradition bill that sparked months of violent protests.

What I didn’t like

  • Retail trade fell by 0.1% in July after a 0.4% increase in June. The annual growth rate of retail spending in NSW fell to 0.4% in July – the slowest pace since August 2011.
  • ANZ job advertisements fell by 2.8% in August after rising by 5.7% in June and July (in aggregate). Ads were down by 11.4% over the year to 156,978.
  • Real (inflation-adjusted) consumer spending rising by 1.9% in the 2018/19 financial year – the slowest annual growth in 5½ years.
  • The trade surplus fell to $7.27 billion in July from a record $7.98 billion in June. Australia has recorded 19 successive monthly trade surpluses. The rolling annual surplus was a record $52.27 billion in the year to July.
  • In August, 85,633 new vehicles were sold, down by 10.1% over the year. In the 12 months to August, sales totalled 1,090,100 units, down 8.1% on a year ago and the biggest annual decline in almost a decade (November 2009).
  • The ‘final’ Markit Eurozone manufacturing purchasing managers’ index (PMI) was unchanged at 47 points in August. The Markit UK manufacturing PMI fell from 48 points in July to 47.4 points (survey: 48.4 points) in August.
  • The IBD/TIPP economic optimism index in the US fell from 55.1 to 50.8 in September.
  • The ISM manufacturing index in the US fell from 51.2 to 49.1 in August (forecast 51.1) – the first decline in three years. A reading below 50 suggests a contraction of activity in the sector.
  • The Challenger survey in the US showed that there were 53,480 job cuts in August, up from 38,845 in July. New claims for unemployment insurance rose by 1,000 to 217,000 in the latest week (forecast 215,000).

Is timing everything in Trumpland?

This week again proved that stocks will surge if a trade deal can be had but recent history in a world according to Donald shows that just when we think a deal will happen, he tweets or says something and the Chinese have to return fire. The economic negatives above show that US job creation is slowing and manufacturing has gone into a small contraction. I think the economic case for a trade truce is now telling Donald, and China too, that this madness has to end to get business investment and economic growth on the up. Fingers crossed DT doesn’t ruin it!

The week in review:

Top Stocks – how they fared:

The Week Ahead:

Australia
Monday September 9 – Lending to households & businesses (July)
Tuesday September 10 – Weekly consumer confidence (September 8)
Tuesday September 10 – NAB business confidence/conditions (August)
Wednesday September 11 – Consumer confidence (September)
Wednesday September 11 – Tourist arrivals/departures (July)
Thursday September 12 – Credit and debit card lending (July)

Overseas
Sunday September 8 – China Exports & imports (August)
Monday September 9 – US Consumer credit (July)
Tuesday September 10 – China Inflation (August)
Tuesday September 10 – US JOLTS job openings (July)
Tuesday September 10 – US NFIB business optimism (August)
Wednesday September 11 – US Producer prices (August)
Wednesday September 11 – US Wholesale inventories (July)
Thursday September 12 – US Consumer prices (August)
Thursday September 12 – US Monthly Budget Statement (August)
Friday September 13 – US Retail sales (August)
Friday September 13 – US Import/export prices (August)
Friday September 13 – US Consumer confidence (September)

Food for thought:

“Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”– Warren Buffett

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:

Shane Oliver, AMP Capital’s chief economist, noted that earnings season saw only 58% of companies report higher profits from a year ago, and the proportion of companies raising or maintaining dividends fell to its lowest level since 2011:

Source: AMP Capital

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