Key surveys of expectations about future economic activity in the United States and Australia have taken a stronger turn over the past week or so. Improving expectations about economic conditions in both countries, combined with continuing very accommodating monetary conditions point to an extension of the almost uninterrupted rise in the value of risk assets since mid-2012.
In the US, the regional February manufacturing surveys have started on a high note with the Empire (New York) state manufacturing survey improving sharply to +10.04 from -7.8 in January. A reading of zero marks the expansion/ contraction boundary line and readings above 10 point to strong improvement. The mid-February University of Michigan survey of consumer sentiment also showed a bigger than expected 2.5 points lift to 76.3. Apart from the brightening outlook for US manufacturing activity and consumer spending Q1 company earnings report season continues to beat analysts’ expectation. With more than two-thirds of S&P 500 companies having reported, 66% have beaten analysts’ pre-season earning expectations.
In Australia, while risk assets have rallied strongly, it has until last week been in the face of predominantly soft economic readings and concern that local company profits had been constrained by poor trading conditions made worse by the persistently strong Australian dollar. The local company profit season, now in its third week, was expected in prospect to be a dour affair, but the reports so far have mostly been more positive than expected – a pleasant surprise.
On the economic front, a surprise 7.7% lift in the February Westpac-Melbourne Institute’s consumer sentiment index was the strongest one-month improvement since December 2010. The very strong improvement in consumer sentiment occurred absent any identifiable trigger in the month. It seems that the accumulation of RBA cash rate cuts through 2012 is starting to gain traction, perhaps heralding a shift to stronger retail spending.
The local economic outlook appears to be brightening, notwithstanding headwinds from constrained government spending and the strong currency. If these stronger signals continue, as Laminar Group believes is likely, it also becomes more likely that the Reserve Bank (RBA) will leave the cash rate unchanged at 3.00% over coming months and will eventually start to lift the cash rate.
We still feel it will be many months before the RBA changes its current easing bias and hints at the need for higher rates. The prospect of weaker mining investment spending, read by some as providing room for the RBA to cut rates further, we see more as providing respite before rates go up. Either way, monetary conditions will be very accommodating with lending interest rates well below their long-term average and at a time when trading conditions for many companies look set to improve.