Economic mood is upbeat in US and Australia
The economic mood is upbeat in both the US and Australia
The end of the financial year is almost upon us. And no doubt businesses will be focused on attempting to lift foot traffic and revenue with end-of-financial-year sales. For most Australian households the focus will be on their finances and the impending tax returns. And let’s not forget there is a lot on the radar for investors to digest.
From an international perspective, not only will the US Federal Reserve feature heavily, but US politics and potential US tax cuts will be dominant factors.
The Federal Reserve kept the federal funds rate unchanged at 0.75%-1% in May. However, the accompanying statement from policymakers was rather bullish, highlighting that the slowdown in the March quarter economic growth as likely to be “transitory”.
The Fed still expects the economy to expand at a moderate pace, noting that business investment has firmed and job gains are solid. It is seemingly more comfortable with inflation, saying it has been running close to target when measured on a 12-month basis. The upbeat outlook has certainly kept the door open for a potential June rate hike.
The rally that we have witnessed on US stockmarkets has largely been on hope of US tax cuts. And in recent months there has been a lot of discussion about US equities being “expensive”. All that will come to a head in the next couple of months under President Donald Trump’s tax plan. He proposes to cut the number of income tax brackets from seven to three, with a top rate of 35% and lower rates of 25% and 10%. In addition, the proposal will chop the corporate tax rate from 35% to 15%. If the White House manages to pass the tax legislation, you could argue that US equities are “cheap” or even fairly valued rather than expensive.
Here in Australia, June is a big month for economic data. All the pieces of the economic growth “jigsaw puzzle” will be put together in late May and early June, culminating in the release of the March quarter economic growth figures on June 7. After the stellar 1.1% rebound in growth in the December quarter, it is likely the economy grew at a more moderate pace. Cyclone Debbie may have partially affected economic activity, although the main impact will be in the June quarter.
When it comes to the Reserve Bank, interest rates are likely to remain on hold in June. In fact, CommSec expects rates to remain on hold for the rest of this year. However, policymakers will keep a close eye on how the economy tracks in the post-budget environment. And in that context the Reserve Bank will be squarely focused on two key areas over the next 12 months: non-mining business investment and the labour market.
The labour market has shown mixed signals over the past few months but with job vacancies holding at six-year highs, a lift in full-time employment is likely.
When it comes to business investment, the March quarter capital expenditure figures released in early June will be of key focus. Not only will they confirm how much businesses invested in the March quarter but they also will provide key metrics around future investment plans.
It is important to keep in mind that the Reserve Bank is firmly in the “glass halffull” camp. In fact, it recently upgraded near-term growth forecasts. Economic growth is now seen at 2.75%-3.75% in June 2018, about 0.25% higher than previously.
All the pieces of the economic growth ‘jigsaw puzzle’ will be put together