29 March 2020
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5 reasons for not being a nervous, negative Nellie

Peter Switzer
28 November 2019

I have to confess I feel like a farmer hoping for rain as I sit here each morning looking for reasons to be optimistic about our economic rebound. However, the good stuff doesn’t have enough forward momentum to get me strongly backing positivity. So I jumped at the opportunity to rerun AMP Capital’s Shane Oliver’s optimistic take on the global economy.

Shane has been an ornament to the economist’s caper and regularly bobs up on my TV show but his optimism was seized upon because his views on the local economy have been more negative than me. He’s been in the 0.5% camp for the cash rate for some time and has proved more right than me on the subject.

The cash rate is now 0.75% and following the RBA boss, Dr Phil Lowe’s speech this week, many economists think the cash rate could go to 0.25% before the bank opted for unconventional policies, such as quantitative easing, which is throwing money at the problem to help banks get interest rates we pay even lower.

I hope those cuts won’t be necessary and maybe Shane’s “Five reasons to be optimistic on the global economy” could actually help those cuts not happen.

Let me sum up his five reasons to resist being negative:

  1. Yields or interest rates in the bond markets are rising and that usually suggests a global economic recovery could be coming. Bond traders are worry warts but they are seen as the canary in the coal mine and the optimism shown by rising yields is a plus for the global economy.
  2. On this subject, some months ago, we were made to be stressed about an inverted yield curve, where the long-term interest rates or yields were below short-term ones, which has been a semi-reliable indicator that a recession is coming. Well, the yield is now un-inverting, so happy days!
  3. Stock markets in Europe and Japan are getting positive and are rising, and Shane says that “these two markets are often a good sign of global growth outside the US as their economies have more cyclical sectors like manufacturing than the more services oriented US economy.”
  4. The US dollar looks like it has peaked and it tends to rise when the world gets nervous about the economic outlook.
  5. Global purchasing managers, who are surveyed, are getting more positive. It’s important when the people who demand and pay for stuff for factories and other businesses are starting to show signs of optimism. This is what Shane says on the subject: “Business conditions PMIs, particularly in Europe, the US, and China recently, may be stabilising, with private surveys produced by Markit starting to show signs of bottoming out. In the US, data shows signs that manufacturing has steadied from the downturn earlier this year, while in Europe the manufacturing PMI hardly changed in November. The services index improved slightly across Europe as well, and despite slight decreases in the US and China, this suggests business sentiment is stabilising.”

I’d add another global plus and that’s the progress on the trade deal talk.

The chart above shows that every time the trade war worsened and a deal look less likely the stock market fell and vice versa.

Want proof? I took the fall in the stock market on the chart at the end of July and put “Trump trade deal + 29 July 2019” into my search engine and this instantly came up from CNBC: “Trump says US will impose 10% tariffs on another $300 billion of Chinese goods starting Sept.1”

I rest my case. If we get a trade deal and we add Shane five reasons to be optimistic about the global economy, then I think the world economy will be a plus for stocks and ultimately Australia which is a very trade-dependent economy.

We need a positive-confidence jumpstart and a trade deal would be what the doctor ordered! Doctor? Dr Phil Lowe would love not to have to cut interest rates again. And on that subject I think most of us would agree. In many ways, the best news we could get in February next year would be that the RBA doesn’t see a need to cut rates.

Let’s live in hope that Donald does the deal ASAP!

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