Australian data was on the soft side with further evidence of lockdowns becoming evident. Real retail sales rose strongly in the June quarter but fell sharply in June and are set to see further declines as lockdowns bite. Job ads fell in July for the first time in 14 months and payroll jobs are also down, led by NSW. The trade surplus rose to a new record high which is great but this is due to high prices (particularly for iron ore) so net exports are likely to detract from June quarter GDP.
In terms of the housing sector building approvals continued to slide following the ending of HomeBuilder but they remain high and the lagged impact of their surge up till March will drive strong housing construction activity for the next six months at least. Meanwhile, housing finance dipped but remains very high and while home price growth slowed in July it remained very strong at 1.6% month-on-month, particularly for lockdown impacted Sydney at 2% month-on-month. Our assessment is that average capital city home prices are still likely to be up by around 20% this year. However, we expect a sharp slowdown to just 5% price growth through next year as poor affordability impacts. And our base case remains that 2023 is likely to see the start of another cyclical downturn in property prices as the interest rate cycle starts to move up more decisively.
What to watch over the next week
In Australia, expect soft readings for business confidence and conditions in the NAB survey (Tuesday) and consumer confidence in the Westpac/MI survey (Wednesday).
The Australian June half profit reporting season will start to ramp up in the week ahead with 35 major companies due to report including Computershare (today), CBA, IAG and Seek (tomorrow), AGL, AMP, QBE and Telstra (Thursday) and Bluescope and JB HiFi (Friday). Consensus earnings growth expectations are for a 50% rise in earnings for 2020-21 and a 56% rise in dividends. The resources sector is expected to see a doubling in profits followed by 58% growth in bank earnings. Outlook statements are likely to be cautious though given the uncertainty posed by recent coronavirus outbreaks and lockdowns.
Outlook for investment markets
Shares remain vulnerable to a short-term correction with possible triggers being the upswing in global coronavirus cases, the inflation scare and US taper talk and geopolitical risks. But looking through the inevitable short-term noise, the combination of improving global growth and earnings helped by more fiscal stimulus, vaccines allowing reopening once herd immunity is reached and still low interest rates augurs well for shares over the next 12 months.
Expect the rising trend in bond yields to resume as it becomes clear the global recovery is continuing resulting in capital losses and poor returns from bonds over the next 12 months.
Unlisted commercial property may still see some weakness in retail and office returns but industrial is likely to be strong. Unlisted infrastructure is expected to see solid returns.
Australian home prices look likely to rise 15 to 20% this year before slowing to around 5% next year, being boosted by ultra-low mortgage rates, economic recovery and FOMO, but expect a progressive slowing in the pace of gains as poor affordability impacts, government home buyer incentives are cut back, fixed mortgage rates rise, macro prudential tightening kicks in and immigration remains down relative to normal. The lockdowns have increased short term uncertainty though.
Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%. We remain of the view that the RBA won’t start raising rates until 2023.
Although the $A could pull back further in response to the latest coronavirus scare and the threat it poses to global and Australian growth, a rising trend is likely to remain over the next 12 months helped by strong commodity prices and a cyclical decline in the US dollar, probably taking the $A up to around $US0.85 over the next 12 months.
Eurozone shares rose 0.3% on Friday and the US S&P 500 gained 0.2% helped by strong US jobs growth but constrained by expectations that it may bring forward Fed tapering. ASX 200 futures gained 30 points, or 0.4%, pointing to a positive start to trade on Monday.
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