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What to watch this week

Dr Shane Oliver expects interest rates to stay on hold this week, the Aussie dollar to bounce and more volatility in share markets. Here's why...

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Interest rates will be the focus in Australia, with the Reserve Bank of Australia meeting on Tuesday and likely to leave them on hold.

While lower than expected wages growth for the March quarter and a still too high Australian dollar support the case for another rate cut to combat downside risks to inflation, solid real economic growth and the Reserve’s (RBA) desire for “further information” after cutting last month is likely to see the RBA wait till August before cutting rates again.

Meanwhile, expect ANZ job ads (Monday) to point to a softening trend for jobs growth but housing finance for April (Wednesday) to show a 3% rise.

In the United States, a speech by Federal Reserve (Fed) Chair Janet Yellen on Monday is likely to confirm that the chance of a June rate hike has been substantially reduced by the soft May payroll report in the US.

US data on job openings (Wednesday) and consumer sentiment (Friday) will also be released.

China’s data for May will start to be released with exports and imports (Wednesday) likely to show a slight improvement and inflation data (Thursday) likely to show a further abatement of producer price deflation but CPI inflation remaining around 2.3% year on year.

Credit data is expected to show a pick-up from the softness seen in April.

What’s likely for markets?

Significant event risk in the next month or so (Fed meeting, Brexit vote, Spanish election, Australian election) and the fear of “sell in May and go away, come back on St Leger’s Day” could drive an increase in short term share market volatility.

However, beyond near term volatility, we still see shares trending higher this year helped by a combination of relatively attractive valuations, ultra easy global monetary conditions and continuing moderate global economic growth.

 Very low bond yields point to a soft medium term return potential from them, but it’s hard to get bearish in a world of fragile growth, spare capacity and low inflation.

Commercial property and infrastructure are likely to continue benefitting from the ongoing search for yield by investors.

Capital city residential property price gains are expected to slow to around 3% this year, as the heat comes out of Sydney and Melbourne.

Prices are likely to continue to fall in Perth and Darwin, but price growth is likely to pick up in Brisbane.

Cash and bank deposits offer poor returns.

After its recent fall from $US0.78 the $A is technically oversold and due for a bounce, which we may be starting to see with a rise to $US0.7365 on Friday.

However, the bounce is likely to be limited and the longer term downtrend looks to be resuming as the interest rate differential in favour of Australia narrows as the RBA continues cutting and the Fed eventually resumes hiking, commodity prices remain in a secular downswing and the $A sees its usual undershoot of fair value.

Eurozone shares lost 1% on Friday and the US S&P 500 also lost 1% initially in response to the poor US payroll report for May, but US shares managed to claw back losses to end down just 0.3% as investors factored in the reduced threat from Fed tightening as the $US and bond yields fell.

ASX 200 futures managed to rise just 1 point on Friday pointing to a flat start to trade for the Australian share market on Monday.

 

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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