11 December 2019
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Don't shoot me. I'm just the economic messenger

Peter Switzer
10 July 2019

Today we get to see the Westpac consumer sentiment number and ScoMo and his Treasurer, Josh Frydenberg would love to see a nice rise. So would business owners and anyone who likes the idea of job security, so keep your fingers crossed.

Yesterday we saw the NAB business conditions index, which rose from +1.2 points in May to +3.4 points in June. That says businesses are feeling better about their business right now. However, business confidence dropped when I would’ve loved to see a spike but maybe that was too high an expectation.

You see, straight after the election result, business confidence spiked from 2 to 7, showing how business loved the ScoMo win. But it has dropped back to 2, but that’s better than what it was pre-election, with readings such as 0.1 and zero. Clearly, business wants to see some real economic growth results before it becomes permanently positively charged.

One of the toughest aspects of my ‘job’ is to make calls on what should happen to a market. And when you do it, not only for financial planning clients but also in the public arena for this website and for our Switzer Report clients, as well as on radio and Sky News on Fridays, the pressure’s on to be right.

Calling an end to rising house prices in Sydney and Melbourne was pretty easy after the booms in both cities surged into 2017, after four years of big rises previously. It was like telling beguiled bitcoin watchers what was likely to happen to the $20,000 plus price level it hit in 2017, so tipping that gravity would take over wasn’t a big punt.

In contrast, tipping when the house price fall ends is harder. The experts at CoreLogic think that a bottom is forming, after Sydney has lost 15% and Melbourne 11%. But any major economic problem from overseas or even locally could force prices down again.

For those who don’t want to contemplate such a thing, Donald Trump’s harassment of the Fed boss, Jerome Powell, means he could easily cut interest rates on July 31, despite a surprisingly great jobs number last Friday.

The 224,000 jobs created in June (when economists expected 160,000) should make a central bank pause when it comes to rate cuts because forecasts of a slowing US economy might have been exaggerated. However, a cut now (possibly when it’s not needed) could help restimulate growth, assist that restrained inflation rate to get going again and, ultimately, create a boom that will require interest rate rises.

The Fed could also be worried that Donald’s trade war could ultimately slow the US economy down so a rate cut could lean against the negatives coming out of the Trump battle with China.

By the way, it will be a big surprise if the Fed runs away from an expected cut. “The probability of a cut remains at 100%, with a 94% chance of being lowered by 25 basis points, according to the CME FedWatch tool,” CNN reported yesterday.

The news agency talked to Steven Ricchiuto, US Chief Economist at Mizuho Americas, ahead of Powell delivering his biannual testimony on Wednesday morning US time. “The markets are likely to further walk back rate cut expectations after the upcoming semi-annual monetary policy report scheduled to be delivered by Chairman Powell,” he said.

“Although the monetary policy report already delivered to Congress clearly states that the Fed will do what is necessary to ensure a sustained expansion, the Chairman can assure Congress that the economy currently looks healthy.”

Looking at the probable surprising, better-than-expected health of the US economy and given the likelihood of a rate cut, then the market forecasts of US profits rising 11% next year make more sense. And it makes someone like me think a 2020 US recession and big stock market sell off might end up being more likely in 2021 (or even 2022), after the US election.

Donald has made my economic guesswork a whole lot harder than usual because this guy is simply so unusual.

From an Aussie point of view, a faster growing US economy helps our growth. A trade deal, which looks harder to see happening soon, will also help, though China’s stimulation to offset the tariff’s impact has helped us create a record trade surplus. Unbelievably, high iron ore prices (due to the tailings dam tragedy in Brazil) have also pushed iron ore prices higher.

Meanwhile, tax cuts, rate cuts, minimum wage rises, infrastructure spending and easier bank lending should help our economy pick up as well. And what about the surprise jump in wages in June, with the monthly reading of labour costs growing at a 1.5% quarterly rate in June, which is the strongest growth rate in 8 years! Who saw that coming? Let’s hope it’s a sign that wages are starting to pick up.

This should assist in preventing a huge house price slump of a 40% kind but we can’t rule out a black swan event that shocks the world economy. If such an unexpected event shows up, then maybe those praying for a doomsday house price slump will have their prayers answered!

Right now, as the economic crystal ball messenger, I’m betting against the Armageddon scenario. But in this game, you can’t be up yourself and overconfident with your predictions. (That’s a lesson some of my critics need to learn.)

But you have to remember crystal balls can be deceptive (just like tea leaves), so don’t be too trigger happy when you don’t like the economic story that seems to be playing out. And that’s because when it comes to economic stories, they can turn on a dime. And with his testimony, Jerome Powell could flip a really important coin today.

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