Our jobs data were quite strong suggesting the quality of the jobs in contributing to growth must have been poor. The unemployment rate fell one notch to 5.2%. A recession does not seem to be on the cards but there is a strong case for the government providing a fiscal stimulus to accompany the work the RBA has at last been doing on rates.

However, for political reasons, the government is wedded to producing budget surpluses. The whole point of fiscal management is to run at a deficit when the economy needs a boost and to pocket the savings when the economy is stronger.

The good news is that the official Australian Bureau of Statistics house price indexes showed a strong bounce in Q3 after a couple of years of falling prices. These data corroborate earlier monthly data released by private agencies.

The house price index went up by +2.5% for the nation in Q3 but about +3.5% for each of Sydney and Melbourne. House price increases are often associated with a boost in consumer confidence through an increased home equity cushion.

China

We reported last month that the Chinese economy started to show signs of weakening. However, the four major economic indicators that we used for that assessment were all strongly up this month and, indeed, were a beat on expectations.

The latest Purchasing Managers Index (PMI) for manufacturing came in at 50.2 for the second month in a row and above the expected 50.1. Manufacturing is not kicking the ball out of the park at just over the 50 level which separates contraction from expansion, but it is growing. The services sector is doing the heavy lifting.
China is removing some of its tariffs on US imports and seems to be embracing the phase 1 trade deal with the US.

In 2020, growth is likely to dip below 6% for the first time in well over a decade. Unlike some, we think that is not an issue to necessarily worry about. In fact, we view it somewhat positively. The context for this view is that, a decade ago, the Chinese economy grew at around 11% p.a. to 12% p.a. But China’s economy has approximately doubled over the last decade so, 6% now is producing the same dollar value increase in GDP that 12% growth achieved a decade ago. The growth rate of all economies slow down as they reach maturity. One day China will grow at rates in the range or 2% to 4% like the US does now – and that will be a good thing for the global economy, all else being equal. Of course, if sub 6% was the result of weak economy rather than a maturing economy, that would be another story – but it isn’t.

US

The impeachment issue has taken up too much space. An impeachment is only the equivalent of an indictment in criminal law. An indictment means that a case for trial has been made. The judge and jury then decide guilt or otherwise – after the case is argued properly.

The impeachment vote went almost along party lines in the (lower) Democrat-held House. All Republicans voted against impeachment but three Democrats crossed the floor to join the Republicans! Since a 60% majority is needed to sack the president in the Senate and the Republicans have a majority in the Senate, it is extremely unlikely that Trump will be sacked.

What is interesting is that Nancy Pelosi, the Democratic leader of the House, is not sending the indictment up to the Senate – at least not yet. She must know she will lose and it is election year. Presumably she has a plan to eke out some political mileage but we do not know what that plan might be.

Many say – and we probably agree – that a sitting President gets elected when the economy is strong. US jobs bounced back strongly last monthly but partly because 46,000 GM workers went back to work after a strike. Either way, the unemployment rate is at the 50-year low of 3.5% and the wage rate increase sits at a reasonable 3.1%.

Now that Trump has the China deal in motion and the new North America Free Trade Agreement (NAFTA) with Mexico and Canada looks set to be implemented, Trump looks to be successful on trade. We do not believe the gains made in these negotiations are great but they are getting the sound bites. There doesn’t seem to be long enough before the election for things to go significantly wrong. Indeed, the trade deals might cause a nice expansion into 2020. There are some people that might not like Trump for a myriad of reasons but he is the poster boy of a strong economy.

If we go back to the 2016 election, a bunch of Nobel Laureates (yes, in economics) said (as we reported at the time) there would be a recession as a result of Trump’s election and his policies. They didn’t actually say when but that ship is taking a very long time to sail, and clearly has not sailed yet.

In mid-2019 many economists (most without Nobel Prizes) argued that because the short-term US interest rate was higher than the long-term interest rate – a so called yield-curve inversion – a recession would follow in 12 to 18 months. That point was laboured in the media for months but now the proponents of that view are scarce.

As we wrote at the time, economic life is far more complicated than looking at a few simple statistics and crying ‘wolf’. Indeed, their thesis on recessions was that an ‘inversion’ is all that is needed – so that the now normal yield curve does not remove that so-called prediction accuracy! If those forecasting a US recession 12 to 18 months after the occurrence of the yield curve inversion were true to their beliefs they would still be arguing for this outcome – but they’re not!

With the Fed and markets at last (more or less) in harmony it is difficult to see anything less than at least a slight boost to the US economy. That, in turn, would mean a boost to company earnings and a boost to the S&P 500. Our forecasts are based on current broker forecasts of earnings, which we use as a directional guide, so we might see further upside in corporate earnings in the coming quarters.

Europe

Readers might recall the media were telling us that the UK electorate was duped over the Brexit referendum. “They didn’t know what they were voting for” and “they will vote the other way if they get a second referendum”. So much for the media! Boris Johnson made Brexit THE election issue and he won with a landslide victory – by 80 seats.

Conservative Party leader Boris Johnson expelled more than 20 disillusioned sitting members before preselection ahead of the ‘BREXIT’ election, in so doing creating a massive united mandate within the Conservative party. We were told from various exit polls that lots of hard-line Labour voters switched to voting Tory by “lending” their votes for Brexit. The implied intention is that these latent Labour voters will return to their grass roots of Labour in five years’ time – after Brexit is locked in. So much for ‘duped’ voters.

It is not for us to judge whether the UK should be in or out of Europe but it is blindingly obvious that the uncertainty has confused investment decision making with respect to the UK and, hence, growth. Trump and Australia seem to be making plans to initiate trade deals with the UK and Europe might now be forced to think that way as well. The CEO of Morgan Stanley, a major international bank, stated publicly that they are not moving any significant numbers of people to Europe from London – a far cry from earlier speculations.

Rest of the World

Japan is launching a $120bn stimulus package as the ‘third arrow’ of the Abenomics initiative when Abe came to power in December 2012. It seems that nothing they do gets inflation working and nor for that matter has any other major economy been successful in creating inflation either.

Christine Lagarde, the new president of the European Central Bank, who reportedly has no training in economics nor experience in banking, has recently stated that she is thinking of changing the inflation target for Europe. While that approach has the appearance of simplicity it has not received meaningful support from leading economists. The concern is that Europe is too big of an economy to let itself off the hook by conveniently moving the goal posts.