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Here are the scary numbers that have worked out for Treasurer Morrison

Peter Switzer
26 April 2016

By Peter Switzer

Five working days to the Budget next Tuesday and a lot of things that could go wrong have actually played out positively for the Australian economy and the Government’s bottom line.

Since February 10, many things that could have gone wrong, which could have added to the fear and loathing that consumers have been feeling lately, have actually gone right.

I’m talking about oil prices, iron ore prices, the overall stock market, the stock prices of BHP, Rio and the banks, Chinese economic data and our economic data. About the only two numbers that have headed in the wrong direction for Treasurer Scott Morrison (ahead of the Budget) are the dollar and the Government’s popularity.

Think about it. Since February 10, the stock market is up 11%, which is good for our super fund returns as well. The oil price has waved $US25 a barrel behind and is now closer to $US43. This has driven Wall Street up and our stock market has played follow the leader.

But wait there’s more…

The iron ore price has shocked everyone, recently hitting $US70 a tonne, after slumping to under $US40 at the end of 2015. It was looking so ordinary that in the Treasurer’s Mid-Year Economic Fiscal Outlook statement, the assumption was made that iron ore would be around $US39. Even if it drops back to around $US50, the Budget’s bottom line improves by, wait for it, $7 billion!

These better commodity prices have made our banks and world banks look less vulnerable to a routing of miners, which could have damaged their balance sheets and their credit ratings.  It explains the recent bounce back in bank share prices.

The chart above shows how ANZ, the most pilloried bank because of its exposure to China and miners, has now attracted some fans, which has helped its share price rise 10% since April 11.

What other things have helped (that also need to stay great before the Budget so Scott can make positive assumptions about economic growth, jobs, confidence and the Budget’s bottom line)?

Well, Chinese data has to remain on the up, as it has in recent months. The US central bank (the Fed) needs to keep its interest rate rhetoric positive for the stock market. It makes an announcement this week.

The Yanks also get durable goods and home sales data as well as the important economic growth number. It would be good if the American story doesn’t spook stock markets this week.

Locally, we see the latest CPI or inflation figure, which should say that the chances of the Reserve Bank raising interest rates would be close to zero in coming months. In fact, a lower than expected result could increase speculation about a cut, which might help bring the dollar down a peg or two.

A high dollar makes consumers feel comfortable about the economy but we get more economic growth with a lower currency. More growth gives more taxes to the Government, as employees pay more taxes than those on the dole (funny that). So the Treasurer wants a weaker dollar.

What else could make or break the Treasurer’s fun on Budget day? A Reserve Bank decision on the day itself but I reckon the RBA will do nothing, so he can rule out a rise or cut.

Over the Budget week, Westpac, ANZ and NAB will give updates on how they’re going and these could spook or boost financial markets.

It must be remembered that the Budget will be the main pre-election statement. Provided nothing crazy happens within or outside Australia, then the Government will feel it has a good chance to win the expected election on July 2.

If the opposite is the case — poor Chinese data, falling commodity prices, a slumping dollar, a capitulating stock market and a run of uninspiring economic readings on our economy, then the odds of a Prime Minister Bill Shorten will start to shorten.

My feeling is that economic and market stuff over coming months will be pro-Government. That said, however, stock markets have had a nice run up and a sell off can’t be ruled out. The final wash up of US company earnings season, which is on now could also be a plus or negative for stock prices as well as investor, consumer and business confidence.

This Budget effort next Tuesday better be more impressive than the work of Scott and Malcolm in recent times — especially on the economic policy proposals front — or they could be in trouble.

So far, the potentially scary numbers have worked in their favour but economies and financial markets are famous for curve balls, especially around May.

I’ve often written about it but “sell in May and go away” is a scary rule of thumb that often works on the stock market.

And yesterday Asian markets were down and Wall Street also gave into negativity overnight. It’s my guess being that this week’s Fed interest rate meeting and oil prices, with these down overnight as well, will dominate stock markets this week. So the Fed’s Janet Yellen and what she does and says could put a lot of pressure on or take a lot of pressure off Scott Morrison next Tuesday.

If you liked this article you'll love the Switzer Report, our newsletter and website for trustees of self-managed super funds. Click here for a FREE trial and to hear more of Peter’s expert commentary and advice.

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