Notable releases last week included the Dec-17 figures for private sector capital spending and private sector lending figures. The market consensus forecast of 1% growth was disappointed with capital spending declining 0.2% in the December quarter as the upswing in non-mining investment struggles to eventuate. The outlook for 2018/2019 remains positive given the latest estimate was 3.5% growth, the highest lift in the initial forecast for the past six years. Also noteworthy was the potential for APRA’s 10% cap on lending to property investors being loosened this year with Chairman Wayne Byres stating the measure had become redundant following the slowing of investor loan growth to 3% in the year to January. Total private sector lending held at a 4-year low of 4.9% with the overall growth in housing credit offset by weakness in business lending which grew 3.4% in the past year.
The S&P 500, Nikkei and Dax performed poorly in the week with the S&P500 breaking its 10-month streak of consecutive positive performance in February. The initial catalyst appeared to be the mid-week comments by new Federal Reserve Chairman Jerome Powell. These have been interpreted as hawkish with markets pricing in the potential for further rate hikes in 2018 under his leadership. President Trump’s promises of tariffs on imported steel and aluminium on Thursday further contributed to the negative outlook by stoking fears of increasing protectionist policies. The ASX200 saw out the last of reporting season with those beating earnings expectations slightly outnumbering the misses compared to previous reporting seasons. The index itself marked this week with flat performance in the year to date sliding 0.8% since the 2017 close.
Westpac walked back slightly on its bearish forecast for the Australian dollar upgrading its year-end prediction to 74c from 72c citing Chinese anti-pollution policies as a cause for underestimated strength in commodity prices. Their medium term outlook remains negative given the interest-rate differential to the US with the premium of the 10 year over its US counterpart being eroded over the past year reducing the carry potential of the Australian dollar.
Comments by new Chairman Jerome Powell have bond investors speculating on a more aggressive Federal Reserve with a commitment to a gradual increase in rates while preventing the economy from overheating being renewed. However, reported core inflation remains below the 2% target so these expectations of rate hikes may need to be tempered depending on the strength of future economic data releases.