Daily Outlook

Stronger than expected US data struggled to convince the market on Federal Reserve tightening in June. Despite retail sales recording a rise of 1.3% (versus -0.3% in March) market expectations for a rate hike in June are sitting around 4%. Equity markets were less pessimistic on the potential for future disruptive Federal Reserve decisions as the S&P500 closed 0.8% in the red. Improving retail sales are not enough to put-to-bed concern over the health of the US economy. Some analysts argue that recent improvements in the labour market and stronger core inflation figures are not enough to offset previous weakness in GDP performance and manufacturing data. We believe the Federal Reserve will remain cautious over the next two months as uncertainty over China remains and the British referendum comes to a head on June 23^rd.

Chinese industrial production figures released on Friday missed expectations, renewing concerns over China’s ability to transition to a domestic-consumption and services based economy. Industrial production grew 6% in April, down 0.8% from the previous year. The larger than expected contraction in industrial output can be attributed to weak external demand combined with declines in mining and industrial sectors such as steel and coal. Despite aggressive monetary stimulus earlier this year, China continues to face significant headwinds in the form of rising debt levels and over-capacity industries. Industry analysts estimate these industries have between 30% and 40% excess capacity. We foresee the complexity of China’s transition posing significant risk to the recovery of the global economy over the coming years. Despite Australia’s best efforts to adjust post-resource boom, as a commodity based economy, economic growth may falter over the medium term.