Economic Update - December 1st, 2017

Economic Update December 2017

by Infocus

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

The rally that keeps on giving

– Banks take a hit

– United States (US) economy stronger than expected

– Europe strengthening

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

On the last day of November, Turnbull announced a Royal Commission into not just banking but the broader financial services industry. Turnbull argued that other politicians were destabilising the economy in their witch hunt over the big banks so he has called an end to the squabbling.
The Big Picture

Importantly the Commission must report back by February 1st 2019 – short by Commission standards. And broadening the scope to even include superannuation – and industry super funds – might worry the opposition?

He is also guiding the Commission to avoid repetition by rolling some of the other banking inquiries into one big Commission set of findings.

The banks’ share prices took sizeable hits immediately following the news but different banks have been hit disproportionately since.

Staying at home, NAB’s business conditions survey produced the best read since 1997 and the labour force data were reasonably strong. But retail sales continue to struggle.

The US economy is booming. The stock market was off on a tear and the November company reporting season was particularly strong.

US consumer confidence came in at the second best number in 17 years. That is, the index was 129.5 against the only higher number (in November 2000) of 132.6. Its Q3 GDP growth was revised upwards from the initial read of 3.0% to an impressive 3.3%. It was only 12 months ago some mocked Trump’s forecast of 4% growth for around now.

Europe is also very strong. Its latest PMI manufacturing read was 60.0 – not only well above the ‘50’ benchmark, but also well above expectations. Merkel has experienced some problems in forming a stable coalition government but life there will go on.

China too surprised on the upside with a growth figure of 6.9% and a PMI for manufacturing of 51.8.

It is true that there are a few less spectacular results here and there but the overall picture is extremely strong.

Going forward, Jay Powell looks set to lead the US Federal Reserve in a calm fashion with no major change in direction from Yellen when he takes over in February. The odds of a US rate hike in December rose to 93%.

The US tax bill is taking shape but it seems a very complicated way of forming government policy from an Australian perspective. But, with ‘core’ US inflation at 1.8%, economic growth at 3.3% and unemployment at 4.1% a ‘Martian’ would be hard pressed not to say that the US economy has well and truly recovered from the ‘Great Recession’ or the GFC as we called it. Which western economy wouldn’t want to swap its figures for these?

There has been a lot of chatter about Bitcoin. We do not claim to have any particular insights and, it seems, few others do either. But, having the price rising around 10-fold in 2017 only to go from $9,000 to $10,000 in days and then $11,000 in one day – only to fall around $2,500 in 90 minutes suggests that this is not a ‘thing’ ordinary investors should pay much attention to. It is difficult enough to form solid views about equities and bonds!

Whether or not we get a Santa rally should be of little consequence to us. We’ll take gains in December, January or February with equal warmth. What is important is that we forecast 2018 to be another good year for equities both here and abroad. Our strategic asset allocations are largely unchanged.

But, of course, one day the rallies will end but not, we think, just yet. Bitcoin may or may not be in a bubble but we think the ASX 200 and the S&P500 are not far from fair pricing.

Asset Classes

Australian Equities

After a spectacular return in October, the ASX 200 backed up with a very solid 1% capital gain in November in spite of the sell off on the last day, due to the announcement of the Royal Commission. Only Financials and Telcos went backwards in November.

We have the market only slightly overpriced but our forecast capital gains for the next 12 months are for slightly below the long-term average.

Foreign Equities

The S&P 500 index reached another all-time-high only hours before the end of November. The end of month rally was spurred on, in part, by the increased likelihood of a tax-reform bill being passed in December.

Brexit appears to be weighing on Europe with the London FTSE and the German DAX going backwards in November.

The general mood on the business TV channels is for the US rally to continue into 2018. Of course, no rally lasts forever and the end can be quite unexpected!

Bonds and Interest Rates

The RBA was on hold again and is unlikely to raise rates before the end of 2018. Indeed, another cut is quite possible before the next hike.

There is an almost a unanimous view that the Fed will raise its rate in December 2017. The question is how many hikes will there be in 2018? The market is still pricing in one or two hikes less than that proposed by the Fed. A lot will depend on if and when fiscal benefits flow through from tax reform in 2018.

The UK raised its prime rate for the first time in a decade.

Other Assets

Oil and copper prices were firmly higher in November. Iron ore prices were up 16% in that same month.

OPEC announced it deliberations with Russia resulted in the supply cut continuing into the end of 2018 – although they will review the situation in June.

These changes in commodity prices bode well for Australia’s resource stocks.

Regional Analysis


With the Royal Commission into Financial Services now a done deal, the government might be able to focus on other economic matters. But, until the by-elections are settled, uncertainty reigns in Canberra.

Only 3,700 jobs were added in November but, importantly, 20,000 full-time jobs were created while part-time losses offset these gains. The unemployment rate fell to 5.4% from 5.5% in the previous month.

Retail sales are still a worry, with only a +0.1% gain announced for October.


China’s GDP growth came in above expectations at 6.9%. The manufacturing PMI also beat expectations with a read of 51.8.

There are always rumours about China debt but the consensus appears to be that we do not need to worry about China at this point.


The US posted another stellar consumer confidence number in November. An impressive 261,000 jobs were created and the unemployment rate fell to 4.1%. The so-called beige book, that paints the official regional picture within the US, talks of wage pressures in some sectors and states. With core inflation at 1.8%, the transition back to a solid economy from the patchy one of recent years are seemingly behind them.

The Senate vote on Jay Powell becoming the next Fed Chair from February 2018 takes place in the first week in December. Continuity in Fed policy seems assured.


Europe is emerging as a powerhouse in world growth. Of course there are issues over Brexit but the squabbling seems contained.

One of the biggest problems is how to deal with Ireland. After the bloodshed and angst over Northern Ireland, stability has seemingly been restored with no economic boundary between the Republic of Ireland and Northern Ireland. If Northern Ireland joins Britain in Brexit leaving the Republic in the Eurozone some border controls seem necessary. A tricky one as all that good work cannot be undone!

Rest of the World

North Korea continues to be a problem but sanctions are closing in on them.

Japan was looking very strong in October and there was no significant negative news in November. The world really is looking strong.

*Ron Bewley (PhD,FASSA) – Director, Woodhall Investment Research


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