Written on the 1 December 2016
What's in store?
Riccardo Briganti Investment Specialist, BT Advice
Economic data has taken a back seat in recent weeks as the US presidential race and the eventual election of Trump has dominated attention. Now that the election is out of the way, focus is likely to return to economic statistics to inform investment decisions including likely central bank decisions. The US Federal Reserve (the Fed) is due to meet on December 13-14 while the Reserve Bank of Australia (RBA) meets in early December.
US economic data has recently presented an economy where positive developments in some areas have been offset by weakness in other areas. This has seen overall growth struggle to break higher, but the risk of recession has been held at bay. The labour market has been the most consistent area of strength but even it has suffered its share of setbacks. Nevertheless, most recently the news has been positive. Non-farm payrolls increased by 161,000 in October with the unemployment rate at 4.9%, slightly below the rate seen a year earlier.
The closely watched ISM index a measure of the strength of the US manufacturing sector also pointed to further improvement, following a lull earlier in the year. The index increased to 51.9 in October from 51.5 a month earlier. A reading above 50 suggests the manufacturing sector is expanding. The related measure for the non-manufacturing sector fell to 54.8 from 57.1 a month earlier.
In contrast, consumer confidence has faltered. The two main measures - the Michigan University survey of consumer confidence and the Conference Board Consumer Confidence index both tumbled in October to the lowest levels since September 2015. It should be noted that, despite the drop, sentiment remains slightly better than the long term average. Election uncertainty has likely played a part in denting confidence. As a result, it will be important to monitor upcoming readings for the post-election impact.
Another US Fed rate hike has been talked about, not least by the Fed, since the first increase in December 2015. US and global growth concerns often triggered by geopolitical events such as Brexit stayed the Fed's hand through most of 2016. Trump's victory was initially seen as another limiting factor, but the fed futures market is now predicting a greater than 75% chance of an increase at the December meeting.
In Australia, the National Accounts released in September showed the economy grew 0.5% in the June quarter to be 3.3% above year ago levels. Private investment remains weak but consumption spending and exports supported the economy. The RBA has increasingly made clear that rate cuts in May and August this year were not prompted by concerns around growth, but rather reflected low inflation and a desire to ensure inflation expectations did not become too negative. There are few signs inflation pressures are substantially increasing in Australia with the headline and underlying inflation figures still below the RBA's 2-3% target range. The next official inflation reading will be available on 25 January 2017.
As in the US, other economic data remains mixed. While consumption provided a strong contribution to June quarter growth, more recent data has been less positive suggesting retail sales increases were largely due to price increases rather than increased sales volumes. Nevertheless, the unemployment rate continues to slowly trend lower reaching 5.6% in September compared to 5.7% a month earlier and 5.9% a year ago.