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Big picture finance: happening this week

Whether you realise it or not, what happens in economics and financial markets this week is likely to shape your money decisions.

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In Australia, expect the National Australia Bank business conditions index to fall on Tuesday a bit but the Westpac/MI consumer sentiment index on Wednesday to hold recent gains.

May jobs data on Thursday is likely to show a decent gain but watch the full time versus part-time mix which has been soft lately and higher participation may drive a slight rise in unemployment to 5.8 per cent.

In the US, the focus will be on the Federal Reserve (Fed) on Wednesday which is expected to leave interest rates on hold.

A June hike was always unlikely given the potentially disruptive Brexit vote taking place a week later, but disappointingly weak May employment data and a lack of urgency in comments from Fed Chair Janet Yellen indicate a June move is very unlikely.

Rather the focus will be on the post meeting statement, Janet Yellen’s press conference, Fed economic forecasts and the so-called “dot plot” of Fed officials interest rate expectations and while we expect the Fed to signal that it still sees two rate hikes this year the overall message is likely to remain that it will be cautious is raising rates given low inflation and the uncertainties around growth.

Given a likely desire to see clear evidence that US activity indicators and jobs have picked up the Fed is more likely to wait till September before moving again.

Meanwhile on the data front in the US, expect to see solid growth in May retail sales (Tuesday), a fall in industrial production (Wednesday), core CPI inflation (Thursday) edge up to 2.2% year on year, the NAHB home builders’ survey (also Thursday) rise slightly but housing starts (Friday) fall slightly.

The Bank of Japan (Thursday) will be watched closely. After the disappointing lack of action at its last meeting the BoJ may now surprise the market with additional easing particularly given that the G7 meeting in late May is now out of the way.

Chinese May data for industrial production, retail sales and fixed asset investment (Monday) is likely to show stable growth.

Outlook for markets

With US shares a bit short term overbought from a technical perspective, significant event risk in the next month or so (Fed meeting, Brexit vote, Spanish election, Australian election, US Republican and Democrat party conventions) could drive a further increase in short term share market volatility.

However, beyond the risk of 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. This has been the story for most this decade now!

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

Capital city dwelling price gains are expected to slow to around 3% over the year ahead, as the heat comes out of Sydney and Melbourne thanks to toughening lending standards and pockets of oversupply.

Prices are likely to continue to fall in Perth and Darwin, but price growth may be picking up in Brisbane.

Cash and bank deposits offer poor returns.

After its fall from $US0.78 the $A became oversold and due for a bounce, which we have started to see.

However, the bounce is likely to be limited and the longer term downtrend looks likely to continue as the interest rate differential in favour of Australia narrows as the Reserve Bank of Australia (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.

The $A is still likely to fall to around $US0.60 in the years ahead.

Eurozone shares lost 2.5% on Friday and the US S&P 500 fell 0.9% as Brexit fears increased. The poor global lead saw ASX 200 futures lose 61 points or 1.1% pointing to a weak start to trade for the Australian share market next week.

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