Key data indicates a resilient Australian economy, tailwinds from China's stimulus, and more...

Some numbers were released last weak that provided further evidence of a strong Australian economy. GDP for the first quarter grew by 0.8% quarter-on quarter (from Q4 2021) and 3.3% year-on-year (from Q1 2021). This was well above economists’ forecasts of 0.5% and 2.9%, respectively. This was driven the economic consumption by average households.

Retail sales also grew by 0.9% month-on-month, which backs up the story of improving consumer spending. Although there are some questions to how durable this spending is, RBA governor Phillip Lowe predicts that a low unemployment rate will push up wages. This should support continued spending.

On the business side of things, Australian company gross operating profits grew by 10.2% quarter-on quarter, far outstripping forecasts of just 4%. These strong results indicate better business conditions than economists thought.

Are you picking up a theme here? I just described the results of three important indicators on the health of the Australian economy, and all three results were better than economists’ forecasts. At this snapshot in time, the economy is holding up better than predicted. The Australian consumer remains resilient, and businesses are still growing earnings, despite some of the challenges.

These strong results are important, as it gives comfort to the RBA that the economy is resilient enough to withstand a tightening cycle of monetary policy. In fact, this bolsters the case for a larger 40 basis points rate hike, to bring it up to 0.75%. The ASX 30 Day Interbank Cash Rate Futures is currently pricing in a 71% chance of an interest rate rise to 0.75%. The decision will be made tomorrow at the monthly RBA meeting.

From an investing perspective, you should not be concerned with a larger hike, as it accelerates the inevitable that rates will need to reach at least a neutral rate to curb inflation. With that being the end goal, we would prefer to see monetary policy being put to use quicker to address the issue sooner rather than later.

We are also seeing some good news coming out of China. Despite the lockdowns, the manufacturing Purchasing Managers Index in China came in at 49.6 for May. With anything under 50 representing a contraction in manufacturing activity, this signifies only a slight contraction. This is impressive, given the impacts lockdowns and restrictions have.

Lockdowns in China are a risk to the exports component of Australia’s GDP. Lockdowns result in softer demand for commodities needed for industry such as iron ore. However, we were pleased to see that Shanghai has recently come out of their lockdown. Given China’s strict Covid zero policy, and the fact that even Sydney went through a 4 month lockdown, this was a little quicker than we anticipated.

This will help ease supply chain issues. A further upside to coming out of a lockdown is the Chinese Government recognises the need for fiscal stimulus to help turnaround the economy’s slowed growth due to these restrictions. Their most recent package was around US$30 billion, including measures to support infrastructure spending, improve supply chain disruptions and provide cash subsidies to business. Policies such as spending on infrastructure will provide support for commodity prices.

Now why are stronger commodity prices so important? As mentioned, exports are a key component of GDP. As it happens, commodities are a significant driver of Australian exports, so higher prices will improve our economic growth prospects. Furthermore, the Materials sector alone is one-quarter of the ASX 200’s market capitalisation, so any improvement to the bottom line of a quarter of our share market will drive the ASX higher.

Over in the US, we are also seeing signs that the American consumer remains resilient. This is evidenced by the latest print for US CB Consumer Confidence which came in at 106.4 for May, well above the consensus forecast of 103.9. This has been underpinned by a low unemployment rate, which has helped push up wages, as well as the strong balance sheets that households have built up over the Covid-19 years. This was aided by accumulating stimulus checks and services such as travel being unavailable.

US Factory orders grew by just 0.3% in April, below expectations of 0.7%. This isn’t necessarily a bad thing. There are signs of inventory build up as some companies became overzealous in their ordering, thinking the demand we saw in 2021 would keep up. Remember when people were selling used cars for more than they bought it for? Thankfully, the peak of the vehicle shortage has passed, with prices starting to come down, which eases the pressure on inflation.

Despite this, manufacturing activity improved overall. The ISM Manufacturing PMI Index climbed to 56.1 in the US. This figure came in above forecasts of 54.5. The PMI is a seasonally adjusted index based on the indicators of new orders, production, employment, supplier deliveries and inventories.

The US added 390,000 jobs in May, above expectations of 325,000. The US has now gained 21.2 million jobs since the April 2020, the height of unemployment as the initial outbreak of Covid-19 took its toll. The US is now within 1 million jobs of pre-Covid levels.

We will be keeping a close eye on inflation figures released this week. The CPI in the US is expected to grow 0.7% month-on-month. Core CPI is expected to increase by 0.5% month-on-month, and 6% from May last year.

Interesting Finance Fact

The first company listed on the New York Stock Exchange was the Bank of New York, in 1792.

Have a great week,

Sam Waldron - Research Analyst

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