2017 - 'Twas a very good year

Mon, 01 Jan 2018  |  

 A year ago, I outlined 10 top calls and forecasts for 2017 for the economy, markets and policy.

The full text of those calls are included below, and my self-rating of the success out of 10 for each of them is in the square brackets in bold. I have tried to reflect the underlying success of the forecast and whether there was money made by taking a position in markets on the basis of those forecasts.

Let me know if you disagree.

In 2016, I got a borderline 50% for my forecasts – it was a mediocre year.

This year has been a whole lot better at 62 per cent which, when it comes to forecasting, economics, policy and markets, is a great result.

I am happy, most of my clients are happy and my 2018 calls will be out in the next day or two.

Cheers, Stephen

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 1. Global stocks

When the dust settles from the irrational market reaction to the US Presidential election win of Donald Trump, US (and most global) stocks seem set to fall. Trump policies in trade, foreign affairs, accountability on government spending and tax could all conspire to undermine confidence when the reality of the misguided policy strategy of Trump moves to reality. How much weakness is hard to say, but the Dow, for example, back to 17,500 would seem likely. It could fall further than this. [0/10 By far the worse call, and hopelessly wrong. The geopolitical issues did not amount to zac, the markets appear to be unaware of the issues associated the crunching of the US budget position, and the tax cuts were a positive for markets. US stocks boomed and I was wrong.]

2. The ASX
With the bearish lead from the US, a likely dip in commodity prices and a firm Australian dollar, expect some pull back during 2017. The ASX may hit 6,000 in the early part of the year, as local interest rate cuts are delivered but the negative influences from offshore will likely counter that. A dull forecast, in many ways, but 5,250 for the ASX200. [4/10 It was a solid year for the ASX with a gain of about 7 per cent, 31 December on 31 December. It hit 6,000 points late in the year, not early, which was a favourable position to take at the start of the year. My within year forecast was askew.]

 

3. The Australian dollar
Interest rate cuts locally and pull back in commodity prices should be negative for the AUD, but with the USD also likely to weaken, the AUD may only fall to US$0.68 to US$0.70 before finding favour and ending 2017 nearer 0.75 than 0.65. More likely and the best trades, the AUD will weaken against a resurgent EUR (target 0.6250), CAD (0.93) and NZD (0.98). Any confirmation of a credit rating downgrade, with related policy shortcomings will help to undermine the AUD. [7.5/10 The AUD ended the year around 0.78, a touch above my point forecast, having traded below 0.7400 in May and peaking above 0.8100 in September. Of importance was the weakness of the AUD versus the EUR and CAD, while the NZD cross was broadly steady. Being short AUD on the crosses was very profitable.]

4. Monetary policy and bond yields
The RBA to cut interest rates to 1 per cent with low inflation and weak growth the key factors. A reversal in the recent terms of trade gains will help fit the rate cut scenario. Bond yields, which has sold off sharply since the middle of 2016, may weaken a little more – Australian 10 year yields could well end 2017 little changed around 2.75 per cent, but might test 3.5 per cent in the early part of the year. [7/10 If have rated that a 7 because throughout the bulk of the year interest rate hikes were priced into the futures market and when they were not delivered, there were moderate profits made running down the curve. This is obviously despite the fact the RBA did not cut rates. This call is a classic example of having a wrong forecast but crying all the way to the bank because of it. 10 year bond yields have ended the year at 2.70 per cent. Thank you!]

5. GDP Growth
The economy is likely to muddle along – real GDP growth will bobble around 2 per cent right through 2017. A few hints of optimism will be dashed with bouts of pessimism. Consumer demand will remain soggy, business investment will keep falling and from around the middle of 2017, dwelling investment will fall sharply through the year. Exports will help to underpin growth, as will strong government spending. [9/10 GDP growth did bounce around 2 per cent with a slight uptick by year end. The ups and downs seen with the flow of such fickle news dominated much of the economic analysis. Consumer demand did in fact remain weak, dwelling investment did slow (not by as much as I thought), business investment trended up during the year and government spending was indeed strong.]

6. Labour market
The economy will not create the jobs needed to drive the unemployment rate lower or to fuel a much needed pick up in wages. The unemployment rate is set to end 2017 higher than in 2016 at 6 per cent, perhaps a little more. Wages growth will remain low at around 2 per cent, with risks that it will drop to 1.75 per cent. The bias to part time employment is likely to continue meaning that hours worked and household income growth will be constrained. [6/10 Employment far exceeded my expectations and the unemployment rate ticked lower through the year, rather than remaining near 6 per cent. Despite this (and something casting doubt on the veracity of the labour force data) was a near perfect forecast on wages which have hovered around 1.75 to 2 per cent.]

7. Inflation
Inflation will edge up from the record lows of 2016, but is unlikely to break above the mid point of the RBA 2 to 3 per cent target range. More likely, underlying inflation will spend most of 2017 around 2 per cent with a slight uptick to 2.25 per cent by year end. The recent commodity price spike may impact headline inflation over the next couple of quarters. [8.5/10 Inflation remained dead in 2017, even though it did tick a little higher through the year. If anything, the forecast was too aggressively high, but still happy with the result which captured the inflation to remain lower for longer theme.]

8. The Budget
The budget numbers will remain problematic, so much so that the triple-A credit rating from all three major agencies will be lost. The deficit for 2017-18 will be close to $25 billion with high government spending and soggy revenue holding back any narrowing. During 2017, gross government debt will exceed half a trillion dollars for the first time. The government may get some benefit from an upgrade to its very gloomy commodity price forecasts presented in MYEFO. [8/10 Pretty good with the MYEFO suggesting a cut in the deficit to $23.6 billion, with the improvement based on an upgrade to commodity prices. Revenue was a touch higher as result, but gross debt smashed through $500 billion during the middle of the year.]

9. Commodity prices
Watch for a moderate pull back after the stellar run of 2016. Good old fashion supply and demand mean oil is likely to head back to US$40 a barrel, iron ore US$60 a tonne, Coal will drop very sharply, by around 50 per cent, as a glut of production unfolds. Gold which has been a dog, may find a few friends at these lower levels and could be a shining light amid the general weakness - maybe US$1,300 an ounce. [3.5/10 Commodity prices were generally higher, but not by a large amount. Oil and iron ore held up, probably because the global economy was in a solid expansion, but the good news was a lift in the gold price to US$1,3000 an ounce – spot on!]

10. House prices
The glut of property will be felt and overall price growth will stall. This, of course, means there will be a few pockets of weakness and prices fall, but with interest rates low and underlying demand strongly supported by a likely 350,000 people in Australia during the year, any price weakness will be moderate. Plenty will be written about this during the year. [8.5/10 House prices did weaken, with a sharp deceleration in nation wide price measures. Sydney prices started falling in September, Melbourne prices are now stalling and in the other major cities, prices growth is in a 2 to 5 per cent range. Hobart registered strong double digit gains, but given is tiny weighting in the national index, the impact was small.]

 

 

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THE LATEST FROM THE KOUK

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This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/will-falling-house-prices-trigger-next-aussie-recession-000039851.html

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 Will falling house prices trigger the next Aussie recession?

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Potential house buyers who have held off taking the plunge in the hope of falling prices seem to be staying away, perhaps hoping for further price falls. But also influential factors forcing buyers away is the extra difficulty getting loans approved as banks tighten credit standards, then there are concerns about job security and associated awareness of probable cash flow difficulties given the weakness in wages growth. It is remarkably obvious that house prices will continue to fall and this poses a range of risks to the economy.

Research from a range of analysts, including at the Reserve Bank of Australia, show a direct link between changes in housing wealth and consumer spending. This means that when wealth is increasing on the back of rising house prices, consumer spending is stronger.

This was evident in Sydney and Melbourne, in particular, when house prices in those two cities were booming in the two or three years up to the middle to latter part of 2017. Retail spending was also strong. Looking at the downside, in Perth where house prices have fallen by more than 10 per cent since early 2015, consumer spending has been particularly weak.

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