Economic growth outlook lifted by sudden appetite for investment, building cools
Economists are counting on hearing a more upbeat Reserve Bank of Australia this week as the impulse for businesses to invest appears stronger.
That could be overshadowed by North Korea's testing of a hydrogen bomb on Sunday, poised to dent risk assets and reverse the rally implied by futures.
The Reserve Bank is expected to keep interest rates on hold this week. Peter Braig
A rebound in planned non-mining business investment revealed last week, lifting hopes the capex strike is coming to an end, means the picture seems slightly more encouraging for the Australian economy. That being true, a bias towards downgrades in the corporate earnings season just ruled off highlights that buoyant business conditions still don't align with how companies are trading.
But a forecast slowdown in the pace of dividend growth for 2017-18 does support the optimism in the capex data.
"You could argue profit levels are significant enough to support stronger capex," AMP Capital's Shane Oliver said. "Growth outside the resources sector is at 6 per cent and non-mining companies have the ability to undertake more investment.
"From a demand perspective, companies might still be a little bit cautious but three out of the four ingredients of higher capex are in place: profits, confidence and low interest rates."
Dr Oliver thinks equity markets are vulnerable to a correction, especially in the US where volatility has been persistently low. The North Korea test and its response could be the catalyst for that "if the situation escalates", although the economist still sees a diplomatic solution.
The Reserve Bank meets on Tuesday, when it is expected to keep rates on hold for a 13th straight month, at 1.5 per cent. The policy decision comes ahead of a speech by governor Philip Lowe in Brisbane at the board's dinner.
On Wednesday, the market sees June quarter gross domestic product growth coming in at 0.7 per cent quarter-on-quarter, and 1.8 per cent year-on-year according to Bloomberg's survey. While improved against the March quarter, the consensus estimates are still what would be considered below trend.
Home building activity has also slowed for two straight quarters, BetaShares Capital finds, and a downturn in this sector could pose a drag on growth.
The Australian dollar is testing US80¢ again, finishing the week at US79.70¢ and up 0.35 per cent in the final session and speculative long positions are still being added, NAB's analysis of CFTC data shows. However, the Australian dollar tends to be vulnerable when geopolitical tensions are stirred.
Earnings per share growth came in at 12 per cent in 2016-17 for S&P/ASX 200 companies, and 2017-18 growth is forecast at 6 per cent, according to Morgan Stanley. The lower than expected earnings outcomes for 2016-17 offset the impact of widespread downgrades to this year's forecasts.
The Australian sharemarket fell 0.1 per cent last month, but thanks to the benefit of dividends returned 0.7 per cent. That is despite the rally in metals and oil which boosted commodity prices last month.
Dr Oliver thinks underlying profit growth in Australia is reasonable, but he highlights that it is "well below" levels reported in the US, Europe and Japan. He puts US profit growth at 11 per cent and Europe and Japan up to 30 per cent.
Dr Oliver is also tipping below-consensus GDP results of 0.5 per cent for the quarter and 1.5 per cent on an annual basis. That is including the slight rise in business investment, strong retail sales, and a flat contribution from net exports.
A big beat by a US manufacturing index offset soft non-farm payrolls data on Friday. US markets are closed on Monday.
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