Rates, growth and earnings

For those central bank watchers, a very interesting week is ahead with three main themes to note: growth, earnings, and the pressure these have on global rates.

ANZ
Source: Bloomberg

You can’t look past China’s GDP today – ANZ are forecasting a bit of carnage with a year-on-year figure of 6.4% (this would send the market into a bit of a fuss). The consensus estimate is 6.8% –  this would be considered ‘near enough’ to the target ‘around 7%’, however it would still be the lowest growth rate since 2009.

Three hours later, China will release its urban investment, retail sales and industrial production numbers – all expected to slide from the previous month. Industrial production is expected to decline to 6% in September after bouncing back in the previous five months from a 25-year low of 5.6% in March.

The People’s Bank of China (PBoC) rate cut expectations are creeping up, but there are still no signs that it will actually act. Chinese President Xi Jinping was interviewed over the weekend and pointed to the ‘sluggish world economy that is weighing on China’s growth’ as the cause for its marked slowdown. There are no suggestions yet that he will interview either.    

US earnings season remains mixed; 57 companies have reported so far, and 71% have beaten expectations on the earnings per share (EPS) line. However, the revenue line has fallen below half, with 48% beating expectations. Top line growth in the US has been ripped to pieces in the past year. The USD is effectively applying a tightening bias on the US economy and the headwinds it's creating see the current ‘growth’ in corporate revenues contracting 6.8% in this quarter (from the small sample so far).

JP Morgan released a report over the weekend estimating that the US is losing 50,000 export-facing jobs a month in 2015 because of global growth and the USD. That compares to the 9000 jobs added in export-facing jobs in 2014. The pressure on the Fed’s first mandate is growing, employment is beginning to feel the pressure of global factors. The Fed funds futures is currently pricing the December rise at 32.6%. The only month that has a noteworthy probability is July 2016, at 74.6%.

Expectations of a cut from the Reserve Bank of Australia (RBA) jumped on Friday. Westpac’s rather bearish report coupled with several economic reports showing further signs of weakness saw the interbank spiking.

Expectations of a cut on Melbourne Cup moved from 26% to 38.5%. The expectation for a December cut has hit 80% from sub 50%. Westpac’s decision to test the pricing power of the Big Four remains an interesting dichotomy. It would be worth watching CBA with renewed vigour this week (NAB and ANZ are unlikely to move rates until reporting their full-year numbers next Thursday and Friday respectively). Expectations would be for Australia’s largest bank to join it in raising rates. However, the longer CBA holds out, customer churn issues will create an uneasy pressure on the bank. If CBA does raise rates, the interbank market’s rate cut expectations will rapidly ascend towards 100% probability.

AUD slid over the weekend. It remains in the 72 cent handle however, with China, the Big Four and the minutes from the RBA all likely to add downside pressure. The 70 handle is the most likely end for the AUD come Friday.  

House clearance rates in Sydney continue to tumble. Melbourne rates remain steady, however the rest of the country is sliding faster with Queensland and Western Australia seeing marked pressures.

Ahead of the open and based on the close of the futures on Saturday, we are calling the ASX up 27 points to 5295.

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.