Despite a wave of positive numbers – GDP, employment, interest rates, equity markets – investors seem reluctant to pull themselves out of their current state of pessimism. We’re not sure why.
Australian GDP growth has surprised on the upside for the past two quarters; with the economy driving forward on strong export growth and consumer consumption. Export growth is likely to continue for the next 12 months as the mining investment continues to increase production.
Consumer spending, whilst promising at the moment, could be more fickle. The warmer-than-expected weather on the east coast of Australia may bring less spending on clothes and energy, although perhaps it will support cafes, restaurants and car sales.
There is also strength in the labour market, suggesting we reached a short-term unemployment high of 6% in January.
One thing to watch is housing, with prices coming off a bit. That said, one or two months of data is not enough to predict a trend. We’ll need to wait and see how much housing growth has slowed.
Against this backdrop, we continue to believe interest rates in Australia will remain stable for some time.  We expect the next rate rise at the end of the year or early next year.
A final word on the Australian Dollar, which continues to defy expectations.  Even when Iron Ore prices are at new multi-month lows. The AUD and Iron Ore prices are usually closely correlated, so we can expect either the AUD to fall or Iron Ore prices to rise.
On the other side of the world, the European Central Bank has unveiled a package of policies aimed at boosting bank lending and countering deflationary risks. We have doubts about how effective these policies will be.
The cut to both the main refinancing rates and deposit rates by 10 basis points was fully anticipated. The ECB, however, doesn’t hold much excess liquidity that would be affected by the now negative rates. The Target Long Term Refinancing Operation is also not a game changer. European banks are focused on reducing their balance sheets not lending.  There also may not be demand for these loans from corporates.
I still believe the ECB needs to implement a bold QE program in order to weaken the Euro and reduce the risk of deflation – similar to Japan.
Finally to the US, where a robust 217,000 increase in non-farm payrolls during May is another indication that the US economy is back on track.
The unemployment rate in the US remained unchanged at 6.3% last month. Average hourly earnings increased pushing the annual growth rate for earnings up to 2.1%.
The falling unemployment rate has not yet triggered any significant pick-up in wage growth.  As mentioned previously, we suspect this will be one of the big economic stories in the second half of this year.