From Jonathan Bayes, Investment Consultant, Bentleys Wealth Advisors.
Firstly, a quick apology for my brief missive last week. I wouldn’t ordinarily be so quick, but I found myself on the hop with travel, and fortunately there wasn’t a huge amount to tell.
Since we are now getting the usual slew of monthly economic data out, its perhaps a terrific opportunity to offer a quick summary of how I see both the U.S and local economy, and how this view is driving our broader portfolio thoughts.
A Quick U.S Economic Update – super strong, but inflation threats building
Early data out from the U.S for May points to ongoing strength.
Manufacturing and service sector data remains extremely strong, new orders continue to grow faster than inventories (excellent for production), and unsurprisingly, both business and consumer confidence remain up and around their highs since the early 2000’s.
As Trump tweeted this week (yawn), the US unemployment rate has indeed fallen to its equal lowest level since the late 1960’s at 3.8%, and job openings in the U.S have surged again year-to-date, rising by a staggering number of 1m to 6.7m.
More people are quitting their existing jobs, presumably for the prospect of better terms, than have done so since 2001.
There is definitely increasingly less slack in the U.S employment market as the job openings attest, and wages are slowly walking up, but as yet there have been no headline wage or inflation scares.
That might be just for now though.
The monthly small business optimism survey conducted by the U.S National Federation of Independent Business (NFIB) indicates respondents see compensation rates at their highest level since the survey begun in the early 1980’s and hiring intentions are only marginally below their highest level in 40 years too.
Echoing this, the ‘Job Openings Hard to Fill’ index is also at or around its highest level on record.
With new order momentum strong and businesses still hell-bent on hiring to fill demand, the potential is surely building for a concerted push higher in annualized wage growth.
Wages are the key concern for longer-term interest rates, but beyond this, other price pressures are building from rising commodity prices and interestingly too, from housing. Note that rental vacancy rates have been at or around 30-year lows for much of the past 2 years, putting potential upward pressure on housing costs.
It will be an interesting 3-6 months on the wage and inflation front, and it would seem likely to me that the risks remain of a surprise on the upside.
Interestingly next Tuesday night we get the May U.S inflation figures. We haven’t see an annualized reading above 2.8% since early 2012, but the risks are building that we see a 3%+ print in the coming months due to the issues I have cited above, but also due to the fact that this time last year inflation readings were at a notable low point, making the basis of comparison all the easier to surprise high.
I think we should all be on alert for some potential uptick in inflationary pressures in the US through the northern summer, and for that reason we still think it’s miles too early to be piling into bond proxy sectors such as infrastructure locally in Australia.
Clearly too, the threat of a spike higher in US treasury bonds on inflation concerns once again leaves equity markets vulnerable to a negative surprise.
Some food for thought.
Australian Economic Update – business economy is excellent, housing and construction is an emerging drag
Unlike the U.S, there isn’t much chance of a surprise uptick in inflation. Yes, employment is on the improve, and yes business confidence is excellent, but we still have significant slack in our labour market to unwind before wage pressures emerge.
This week we got confirmation that local manufacturing and construction sectors continue to grow nicely, and in fact, our services sector is showing its best momentum since pre-GFC (mid 2007). At a corporate level, there are grounds for continued optimism.
But the housing market, and forward construction indicators in apartments in particular are looking a little ropey.
We have made much of the likely negative impact the Royal Commission will have on liquidity provision for housing, and it is hard to dispute the impact is already being felt.
The national auction clearance rate fell to just shy of its lowest number since early 2013 – a significant date since this is when housing seemed to bottom as the RBA got serious about cutting local interest rates.
Unsurprisingly alongside this new softness in housing, Australian banks continued their malaise, reaching a new 6-year low against the ASX200.
We have tried to position portfolios to reflect this dichotomy in our economy, persisting with our perennial underweight in the major high street banks, and advocating for exposures to businesses leveraged to the economic strength, notably SEEK (SEK), APN Outdoor (APO), Downer (DOW), QUBE (QUB) and perhaps even Vocus (VOC) given the latter’s significant corporate telecommunications operations.
All of these shares have performed well for us, or at least are starting to do so.
Have a great week!
Friday 10am values
|S&P / ASX 200||6057||+45||+0.7%|
|Property Trust Index||1399||-4||-0.3%|
Thursday Closing Values
|U.S. S&P 500||2770||+65||+2.4%|
Key Dates: Australian Companies
|Mon 11th June||PUBLIC HOLIDAY NSW & VIC
|Tue 12th June||N/A
|Wed 13th June||Div Ex Date – WBCPF, WBCPH
|Thu 14th June||Div Ex Date – NABPC, WBCPE
|Fri 15th June||Div Pay Date – CBAPC, CBAPD, CBAPE, CBAPF, CBAPG
8th June 2018, 11am
For more information on the above please contact, Robert Flynn, Senior Financial Advisor, Bentleys Wealth Advisors directly or on 02 9220 0700.
This information is general in nature and is provided by Bentleys Wealth Advisors. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.