Australian economic data was mostly good. Home building approvals fell sharply again in May reflecting the end of HomeBuilder but they remain strong and their lagged rise points to a further increase in dwelling construction. Retail sales were revised up in May and even if they fall -1% in June on the back of the lockdowns are on track for a strong June quarter rise. Meanwhile, payrolls are up 3.4% on pre-coronavirus levels and ANZ job ads rose another 3% in June. Finally, the Melbourne Institute’s Inflation Gauge points to a pickup in inflation in the June quarter but nothing like this has been seen in the US, which will keep the RBA relatively dovish for now on rates.

In the US, the focus is likely to be on June inflation data with largely transitory pandemic related bottlenecks continuing to impact but with some slowing in the rate of increase as pressure starts to abate, ‘a bit’ thanks to increasing production and slowing goods demand. Expect CPI inflation (today) to slow slightly to 0.5% month on month taking the annual inflation rate down to 4.9% year-on-year from 5% in May. Monthly core inflation is also likely to slow slightly but with the annual rate rising further to 4% year-on-year. Producer price inflation (Thursday) is also expected to show some slowing in the monthly rate of increase. Meanwhile, expect small business confidence (today) to remain solid, a further solid increase in June industrial production and solid readings for the July New York and Philadelphia regional manufacturing conditions indexes (all Thursday) and a slight pickup in underlying June retail sales (Friday).

June quarter company profit results will start to trickle in with the consensus looking for a 62% year -on-year rise boosted by base effects but the rebound in various macro variables suggesting this could end up being +90% or so. 

In Australia, the NAB business conditions and confidence survey (today) and the Westpac/MI consumer confidence survey (tomorrow) are expected to show some softening reflecting recent lockdowns but to still solid levels. Jobs data for June (Thursday) is expected to see employment constrained a bit by the late May/early June Victorian lockdown but we still expect employment to rise by 20,000 jobs with unemployment unchanged at 5.1%.

Outlook for investment markets   

Shares are vulnerable to a short-term correction with possible triggers being the latest 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. 

Still ultra-low bond yields and a capital loss from rising yields are likely to result in negative 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 now look likely to rise 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. 

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 1.6% on Friday and the US S&P 500 gained 1.1% helped by investors “buying the dip” and possibly news of monetary easing in China. The positive global lead saw ASX 200 futures gain 76 points, or 1.1%, indicating a strong open for the Australian share market on Monday.