Trade war to re-start

By Alex Moffat. Published at Mar 1, 2019, in Market Wrap

Having spent the past four days clearing my desk of the accumulation which typically occurs during two weeks absence, I find I have time to pen a few thoughts. My main thought is nothing appears to have changed.

A reminder popped up in my diary this morning that the truce in the trade war between the US and China ends today. The timing is great, with US GDP showing a slowdown and Mr Trump still pressing on with his wall.

US GDP rose at an annualised 2.6% during the December quarter with momentum hit by weaker consumption. The number is well down from the 3.4% and 4.2% reported for the previous two quarters and suggests a trend may be starting.

Delving into the numbers the US economy grew by US$1 trillion during the December quarter, remember that consumption represents 85% of that number, and government debt rose by – wait for it – US$1.3 trillion.

Mr Trump’s economic miracle is being pumped up by borrowings, the chart below reflects this nicely:

US government debt has risen by US$1.3 trillion.
US government debt has risen by US$1.3 trillion.

The reporting season appears to have been good overall with investors benefitting from special dividends from Wesfarmers, BHP and Rio to mention a few.

The NBN seems to find its way into more and more conversations and another such instance yesterday lead me to the internet where I found a recent letter to the Editor of the Australian Financial Review from Kevin Rudd. We all remember him. Mr Rudd opined in his very lengthy piece on the NBN that “It was never envisaged that the NBN generate a commercial rate of return”. The next time I get one of those statements from the ATO showing me how my taxes are spent by government I shall look for that line item.

Pressure appears to have come off interest rates, indeed there are forecasts of a cut by the Reserve Bank - although my forward synthetic interest rate curve doesn’t give it more than a 25% chance.

That said the more important aspects of our economy must be the high level of household debt, weak wage growth and insipid inflation. The up-and-coming budget to be read on 2 April will no doubt be full of election winning hand-outs, but the challenge will be in addressing the big items.

After a soft night on Wall Street our index futures are up 6 points and the Australian Dollar is weaker at US$0.7095.

Alex Moffat is a director at Joseph Palmer & Sons.

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