David Bassanese

So it seems that Donald Trump’s campaign rhetoric on trade is likely to be quickly put to the test. How countries respond to this antagonism remains to be seen, but the omens are not good. So far at least, Wall Street still seems to want to rally, preferring to focus on Trump’s promise of fiscal stimulus, rather than his threat to the international trade order as we know it.

Contrary to the usual fears that dominate the financial headlines, the Australian share market ended up posting reasonable performance in 2016, and the outlook – despite a sluggish economy – appears encouraging as we head into 2017.

2016 was another year of thrills and spills for global financial markets, and 2017 is likely to prove just as tumultuous.

I’ve got good and bad news for Australian investors as regards our fiscal outlook and credit rating.

So much for market concerns with a Trump Presidency.

Much as I would like to stir the pot by suggesting that the Reserve Bank of Australia should and will cut interest rates on Melbourne Cup day, I actually agree with market expectations that it’s now a relative long shot. What’s more, to my mind, the case for a further rate cut anytime soon is quite weak.

An emerging investment theme over the past few weeks has been a possible re-evaluation by central banks of their extra-ordinary monetary stimulus measures.

Although the greatest mining boom in Australia’s history is winding down, if all continues to go well with China we should soon start enjoying the next great boom – growth in Chinese consumer spending, and on food in particular. But for China’s economy to evolve toward more consumer spending and services, more of the benefits of its economic development it seems, will need to be better shared.

For many investors, the main focus in the United States economy is whether or not the Federal Reserve will raise interest rates in coming months. On this view the outlook seems binary.

To my mind the Chinese economy, the Australian dollar and iron ore prices are all defying gravity at present and all crucially dependant on Chinese policy leaders being able to keep pumping up a bubble in debt-fuelled public sector investment.

The Reserve Bank of Australia’s decision to cut the official cash rate has again typically had it fair share of critics. Some commentators suggest the RBA should not have cut rates as the economy is still travelling along relatively well, while others suggest the RBA has left its rate cutting efforts too late, which is why inflation is now too low for comfort.

The July 27 June quarter consumer price index report should lay the groundwork for a follow up interest rate cut by the Reserve Bank on August 2. But unlike some other economists, I’m less convinced the RBA will continue to cut interest rates much further heading into 2017.

With the Brexit vote looming large, markets are understandably on tenterhooks as to the outcome.

I have long thought that the next move in local official interest rates would be down. Although the Reserve Bank of Australia has of late appeared comfortably on hold, to my mind, persistent low inflation and an eventually rising unemployment rate (as the labour intensive home building boom slowed) would eventually force the RBA’s hand.

News this past week that the Reserve Bank of Australia is growing increasingly uncomfortable with the high Australia dollar suggests the barriers to another interest rate cut has been lowered somewhat further.

Investors are warned: we are only one or two economic report cards away from a potentially devastating reassessment of the global economic and financial market outlook.

Despite the fixation of many global central banks with the perils of deflation, there appear to be important supply-side dynamics taking place across the global economy which suggest either low inflation can co-exist with reasonable output and employment growth, or that inflation is set to take off and further help from central banks may not be required.

Among the many reasons being cited for the current global equity market sell-off, one jarring realisation is that the promise of more central bank stimulus does not appear to be working any more. Not only is it not working, it is arguably now detrimental to stock market health as near zero- and even negative – official interest rates undercut the ability of banks to make money.

As was the case last year, it is hard to see 2016 being anything other than a stock pickers market. Due to stretched equity valuations and a sluggish corporate earnings outlook, chances are that overall price growth for the Australian market will be fairly muted.

Although there are many reasons that might justify a corrective pullback in global equity markets, concerns over the Chinese economic outlook seems among the more flimsy. To my mind the Chinese economy is still enjoying an orderly economic slowdown and global market reactions to developments in Chinese financial markets are a gross over reaction.

After digesting the key economic news events of recent weeks, I’m left with the following impression: I’m pessimistic on our economy in the short-term, but optimistic on the longer-term challenges we face.

The Reserve Bank of Australia has told us to “chill out” this Christmas and right on course it duly decided to leave interest rates on hold at its final meeting of the year. The RBA still retains what I’d describe as a modest easing bias, with the Governor suggesting if interest rates move anywhere anytime soon it will be more likely down than up.

When prices in certain financial assets have already fallen a long way, it’s tempting to believe that the worst may be over. We all love a bargain after all. But buying something that is continuing to fall is described as like “catching a falling knife”.

To my mind, the $A appears on the cusp of its next major move lower. If you were not already a buyer of US dollars (such as through a $US ETF), the $A recent rally would have been a great time to get onboard.

Westpac’s decision to unilaterally lift home loan interest rates by 0.2% – and the likelihood that the other majors will now follow – has raised the chances that the Reserve Bank of Australia will counter the move by lowering official interest rates.

From peak to recent trough, the decline in the Australian share market over recent months has been 16.5% – or very close to the “bear market” definition of a 20% decline. To my mind, we will likely see stocks dragged somewhat lower before this period of corrective market activity is over – we will, as least definitionally, tumble into a bear market.

The Fed’s decision to again delay raising official interest rates in September can only be described as ludicrous in view of the fact the US economy is almost near full employment. Indeed, America’s jobless rate is a mere 5.1% and the economy is almost near fully employed.

What was once expected to be a temporary stock market correction – due to both overvaluation and imminent US interest rate hikes – appears at risk of turning into something more enduring if the Australian economy fails to lift itself from the mire sometime soon.

Markets interpreted the minutes from the July Federal Reserve meeting as reducing the risk of a September interest rate “lift off” – but to my mind that just seemed wishful thinking. I still think September is a good bet. Worryingly markets don’t yet seem to have priced in this risk – the sell-off in recent days appears to reflect concerns over China and oil prices.

Every commentator around the country has noticed an intriguing change of language from the Reserve Bank of Australia when it comes to the Australian dollar. But by my reckoning, the implications of this change have been largely misinterpreted.

All smoke and mirrors – no fire.

Contrary to consensus market opinion, I’m hoping Greece does fail to seal an 11th hour agreement with its creditors. If it does so, it won’t change any of Greece’s underlying problems and will only “kick the can down the road” a little further.

The warnings by both Federal Treasury Secretary John Fraser and Reserve Bank Governor Glenn Stevens over Sydney house prices in recent times has led some analysts to suggests interest rates are even less likely to fall further this year.

The latest survey of business investment intentions from the Australian Bureau of Statistics made for very bleak reading. Not only is the non-mining sector not revising up their capital spending plans – as anticipated by the Reserve Bank of Australia – they have actually revised them down. Allowing for the differences between expected and actual investment outcomes over time, the latest survey suggests overall private business investment will fall by around 20% next financial year.

Federal Treasurer Joe Hockey’s claim that the Government’s latest budget provides a “credible path back to surplus” has been widely derided – as is usual. According to the Budget papers, the now yawning budget deficit of $35 billion expected for 2015-16 (2.1% of GDP) is then projected to gradually shrink over the next few years, such that by 2019-20 it should again be back in the black.

Despite Reserve Bank Governor Glenn Stevens’ concerns about Sydney property prices, chances are the RBA will finally deliver the second official interest rate cut for the year on Tuesday afternoon.

We’re only a few weeks from the next Federal Budget and already the omens are not good. Due to the slump in commodity prices, and ongoing general weakness in the economy, we know that the Budget will contain another confidence jarring write down in government revenues. Prime Minister Tony Abbott this past week hinted the loss could be around $30 billion over the four year forward estimate period.

The differences in philosophy between the Reserve Bank of Australia and the United States Federal Reserve are becoming starker, which will not make of the job of the RBA any easier in coming months.

Late last year I suggested the Reserve Bank of Australia “may well cut interest rates in the new year”, though with hindsight I was not strong enough with my view. The glory in making such a bold call went to other economists such as Bill Evans at Westpac.

To my mind, the case for monetary policy tightening in the United State is a “no brainer". So it bemuses me to see in the latest Fed policy minutes the world’s most important central bank is still dithering over when to raise interest rates.