Donald Trump

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GUEST OBSERVATION 
The past week has been light on data, but full of angst. At the centre was President Trump again raising questions over the appropriateness of the Federal Open Market Committee's (FOMC) ongoing gradual normalisation.
The market subsequently found cause to be more cautious on growth, the S&amp;P500 jolting 3% lower on Wednesday before recovering almost 2% on Thursday. Markets across the world, by and large, followed suit.
During an interview with the Wall Street Journal, President Trump made clear his displeasure with the FOMC over their gradual normalisation.
President Trump’s focus was arguably more on his economic legacy than the appropriateness of the FOMC’s actions, made clear by comments referencing President Obama’s “zero [interest] rates”.
But President Trump did clearly say that he sees the FOMC as the biggest risk to the US “because I think interest rates are being raised too quickly”.
Many across the globe would instead argue that it is his administration’s trade policies that are the greater cause for concern, particularly with respect to business investment.
While the US Markit PMI’s held up in October, according to the flash release, core durable goods shipments and orders both showed weakness in September.
For core shipments, September was the second consecutive flat outcome. Core orders furthermore signalled that growth is to remain absent, falling for a second consecutive month in September.
This soft trend fits with the deterioration seen of late in the regional business surveys’ investment intention series, but is a stark contrast to the optimism around fiscal expansion and domestic demand.
Taken together, these observations highlight the uncertainty that the tariffs have created.
Combined with the end of extraordinary fiscal policy in late-2019, the negative shock to business investment from the US’ own tariffs is crucial to our view that growth will decelerate through mid-2019 and see the FOMC go on hold – indefinitely.
US housing data released this week gave the FOMC an additional reason to be cautious but not alarmed.
New home sales fell over 5% in September; moreover, this was the fifth decline in six months.
If we take a step back and consider data for the past two years however, the trend looks more flat than downward.
Given home builder confidence and Case-Shiller house price growth remain strong, and the 30-year mortgage rate accommodative, the current level of sales should persist and inventories remain manageable.
Turning to Europe, the ECB met for their October meeting this week. By and large, their views were unchanged.
The Council continues to have considerable confidence in the domestic economy, particularly the strength of employment.
The latter is expected to flow through to wages and underlying inflation in time, bringing inflation to the ECB’s ‘near 2% year target’. Although risks are still considered “broadly balanced”, evident in the Q&amp;A however was that external risks to this view have built.
This highlights a need to pay close attention to the ECB’s forecasts as they are updated at the December meeting and the end of each quarter thereafter.
We remain of the view that only the deposit rate will be increased from late-2019, with the refinance rate to wait until at least mid-2020. Risks to this view are skewed towards a later start to hikes.
Coming back to Australia, in the absence of any data, RBA discussion of the labour market was the focus.
Following the unemployment rate’s jolt lower to 5.0% in September, historically the benchmark for ‘full employment’ in Australia, Deputy Governor Debelle remarked this week that “We [the RBA] have an open mind on the question of what actually constitutes full employment”. 
Westpac’s own view is that the unemployment rate consistent with full employment is actually likely to be well below the current 5.0% figure, hence wage growth and inflation are unlikely to pick up anytime soon.
This fits with the experience of the US where, with the unemployment rate now a percentage point below historic estimates of ‘full employment’, wages are only just starting to accelerate robustly.
Looking ahead, we see the Australian unemployment rate holding near 5.0% through 2018 and 2019, and hence wages growth and inflation remaining benign.
The next key update for Australia will be the September quarter CPI report, due next week.
On all fronts, it is expected to highlight the absence of inflation pressures and justify the RBA remaining on hold through 2019 and 2020.    
Elliot Clarke is a senior economist at Westpac and can be <a href="https://www.westpac.com.au/news/authors/elliot-clarke/" target="_blank">contacted here.</a>
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Trump's tariffs likely to lead to further interest rate caution: Westpac's Elliot Clarke

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Donald Trump's newly appointed manufacturing council head Andrew Liveris has decided to keep his beach house at Whale Beach.
The Michigan US-based Dow Chemical chief and wife Paula might now get to build on the 1970s home that they bought for $3,675,000 for in 2006.
The home sits on a 1,100 sqm parcel sloping down to the ocean.
Belle Property Avalon selling agent Greg Griffin, who had marketed it as a 'premier site for a new home,' has pulled the property from this weekend's auction.
Upon Andrew's retirement, the pair are expected to head to their triplex apartment in Point Piper that they bought for $8.15 million in 2013.
Liveris, who previously worked on an advisory panel for Barack Obama, was branded by President Donald Trump as "one of the foremost leaders in manufacturing, one of the foremost leaders in the world of business".
The Darwin-born businessmen has been the chief executive of Dow since 2004 and is considered as one of the world's best known CEO's.
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Trump's manufacturing head Andrew Liveris keeps Whale Beach trophy

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GUEST OBSERVER
Supporters and critics alike agree that Donald Trump says many contradictory things, and that's part of the problem.
Most Australian property investors are confused. They have no idea how his presidency will affect their investments.
Well, I frequently get asked about Trump, and I have some answers for you. The Chinese investors we work with ask us often about the new U.S. President — and other events in the 89 countries where we offer listings for them to purchase. 
Here, I share our three most important insights on managing real estate investments in the era of President Trump.
Buy dependable value
Trump's White House has been described by its own allies as "chaotic" and as suffering from "obvious dysfunctionality." The United States is torn between those who ferociously support him and those who are just as vociferous in their rejection of everything he stands for.
Some of this turmoil is making its way to Australia. Cory Bernardi and Pauline Hanson are among those who have announced they hope to reorient Australian politics and society in a more populist fashion. Many promise to resist.
Politics is in ferment, and politics does affect the economy. A Parliament in turmoil can't pass economic reforms, infrastructure plans or jobs bills.
In this environment, a smart property investor will look for assets with enduring value. Now is not the time to speculate on quick capital gains.
Be strategic and play it safe with a long-term investment in suburbs that have good access to transit, shopping and quality schools. If you negatively gear, try to keep your negative cash flow well within manageable territory — in case the worst happens, like losing your job or facing unexpected, large expenses.
Find opportunities amidst the confusion
We all hope President Trump doesn't start a trade war (or any other kind of war). If he does create market turmoil, however, smart investors will look for opportunities among the confusion.
Warren Buffett's famous advice applies here: be greedy when others are fearful and fearful when others are greedy.
Remember, Trump can serve as President for only four years, or eight if he is reelected. And, as we have seen with the last several Prime Ministers, even Australian politicians come and go.
The Commonwealth, on the other hand, is a prosperous country with a swelling population that is relatively enlightened, innovative and industrious. Whatever the short-term vicissitudes, it is impossible to imagine this country being poorer or smaller in 10 years.
If the current political disputes hurt confidence and undermine the market, that is your moment. Seek to find buying opportunities whose price has suffered, but which look likely to revert to trend in the medium term.
Look to Asia
Ours has been branded the China Century for a good reason. China already has the world's largest total population, the world's biggest middle class and the world's most numerous ultra-high-net-worth demographic.
Chinese are the biggest property investors in Australia, the USA, Canada, the UK, New Zealand, Thailand, Singapore, Hong Kong, Japan and many other countries.
Australia exports more to China than to any other country. China is our largest source of international students, our most valuable tourism market, a major source of foreign direct investment and our largest agricultural goods market. 
If you work in the property industry, then you need a China strategy. If you invest in property, then you need to understand how Chinese buying trends affect your investment.
These are my three tips for succeeding at property investment during this unpredictable moment in time.
Gavin Norris is head of Australia for Juwai.com, the No. 1 Chinese international property portal and can be contacted <a href="https://www.juwai.com" target="_blank">here</a>.
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What does Donald Trump mean for your property investments? Gavin Norris

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The US-based Dow Chemical chief - Andrew Liveris - who is Donald Trump's newly appointed manufacturing council head - has listed his redundant beach house at Whale Beach.
It has been marketed as a "premier site for a new home" by Belle Property Avalon agents Greg Griffin and Laura Mears, who have a March 18 auction date.
With plans to rebuild, they paid $3,675,000 in 2006 for the split level 1970's built home that sits on a 1,100 sqm block sloping down to the ocean. 
Andrew and Paula have pinpointed their Point Piper triplex apartment as their intended home on returning to Australia when Andrew retires.
It was reported last year that Andrew was set to hang up his boots in 2017, however his new role in the Trump regime may delay it.
Trump branded Liveris as "one of the foremost leaders in manufacturing, one of the foremost leaders in the world of business", during a rally in Michigan in December, when he announced his role.
Liveris had previously worked on an advisory panel for Barack Obama.
The Darwin born businessmen has been the chief executive of Dow since 2004 and is considered as one of the world's best known CEO's.
Andrew and Paula are based near the Dow chemical HQ in Michigan. They spent US$250,000 on a 6000 sqm property opposite the Midland Country Club in 2004 and rebuilt two years later.
The $8.5 million Point Piper apartment, offering direct access to Lady Martins Beach, was completed by architect Nevio Casali.
This article first appeared in The Sunday Telegraph.  
 
 
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Donald Trump's manufacturing fixer Andrew Liveris lists at Whale Beach

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GUEST OBSERVER
Global share markets rose over the last week helped by a combination of good economic data and announcements from President Trump progressing his deregulation and tax reform agenda.
Bond yields mostly fell though helped along in Europe by dovish comments from ECB President Draghi. Commodity prices were mixed with oil down but metals up and iron ore at its highest since 2014. The $US rose and this saw the $A pull back.
The message from the first few weeks of Donald Trump’s presidency is that while he and his administration is generating a lot of noise on a lot of issues as long as he continues to make periodic announcements progressing his pro-growth policies – rolling back Dodd-Frank, working towards a “phenomenal” tax plan, making “life good” for airlines, etc – then share markets will respond positively. So while all the noise around the travel ban, whether the Lindt Café siege was “underreported” (I was in Memphis on an Elvis pilgrimage at the time and the siege had plenty of coverage on US TV!), etc, is interesting, investors should continue to turn down all this noise when making investment decisions.
While unwinding the Dodd-Frank financial regulations will take time and face constraints (as it will likely require the support of 8 Democrat Senators, although it may be possible to find work arounds), tax reform is likely to proceed more quickly as Congress has already done significant work on it and it can pass through the Senate using budget reconciliation rules that only require a simple Senate majority – which the GOP has. It now looks likely that the Trump administration will submit a tax plan to Congress in a few weeks – this is almost certain to include a cut in the corporate tax rate (to 20% or so) and possibly also a cut to personal income tax rates. Its less clear whether a “border adjustment tax” (rebating tax on exports and taxing imports) will be included. Taking the US corporate tax rate from 35% to 20% will put massive pressure on Australia at 30% and other countries to follow suit (the OECD average is around 25%).
In Australia, the Reserve Bank left interest rates on hold as expected, but in its Statement on Monetary Policy made little significant changes to its growth and inflation outlook seeing December quarter GDP growth rebound, growth averaging around 3% over the next few years and inflation heading back to 2% by year end.
The Bank’s post meeting statement, a speech by Governor Philip Lowe and the Statement on Monetary Policy all presented a relatively upbeat assessment on the economic outlook. While we have growth outlook, our view remains that it will take longer for inflation to return to target than the RBA is allowing, particularly with wages growth remaining at record lows and the $A trending higher. As a result we remain of the view that the RBA will cut rates again this year, probably in May after the next round of inflation data.
<a href="https://www.propertyobserver.com.au/images/2017/02/10/Screen%20Shot%202017-02-10%20at%202.06.27%20PM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/02/10/Screen%20Shot%202017-02-10%20at%202.06.27%20PM.png" alt="">
Given the improving global growth and inflation outlook though and the desire to avoid adding to financial stability risks, our call for another RBA rate cut is a close one.
Surprisingly, the RBA’s level of concern around the property market does not appear to have increased despite a further pick up in lending to property investors and rapid price growth in Sydney and Melbourne. This appears to partly reflect the RBA’s assessment that lending standards have tightened, the supply of property is set to rise with longer than normal lags and that part of the recent upswing in investor credit may reflect investors paying for properties bought of the plan some time ago. There still remains a case for a precautionary lowering in APRA’s 10% investor credit growth limit though.
Major global economic events and implication
US job openings, hiring and quits remained basically unchanged at relatively high levels, jobless claims fell to ultra-low levels and the trade deficit narrowed slightly in December. 71% of US S&amp;P 500 companies have now reported December quarter profits with 75% beating earnings expectations with an average surprise of +3.6% and 51% beating on revenue. Earnings are now expected to be up 6.3% from a year ago.
Japanese data showed a slight fall in confidence and continuing weak wages growth but improved machinery orders, a rise in Japan’s leading index and an ongoing decline in bankruptcies and the first annual rise in producer prices since March 2015.
Chinese foreign reserves fell below $US3trillion for the first time since 2011 and are down from a high of $US4trillion highlighting that China continues to see capital outflows and is using its reserves to slow the decline in the Renminbi (are you listening President Trump?).
The Reserve Banks of India and New Zealand both left interest rates on hold and both look to have a neutral stance for now but with the RBNZ pencilling in one hike in 2019. 
Australian economic events and implications
Its too early to read much into the December half profit reporting season because less than 20 major companies have reported to date. But so far so good with 67% exceeding earnings expectations compared to a norm of 44%, 67% of companies seeing profits up from a year ago and a stronger than expected result from Rio Tinto confirming that the turnaround in resources sector profits is on track. 
On the data front in Australia, December quarter retail sales volumes rebounded 0.9% adding to confidence that consumer spending and hence GDP growth rebounded in the December quarter. While retail sales unexpectedly fell 0.1% in the month of December, this reflected a sharp fall in hardware, building and garden supplies (possibly reflecting the wind down of Masters) so is unlikely to mean much. Meanwhile new home sales were flat in December according to the HIA but still appear to be tracing out a gradual downtrend since their high in 2015 and December housing finance commitments saw a slight swing back in favour of owner occupiers but not much given the strong gains in investor lending in prior months.
What to watch over the next week?
In the US, the focus is likely to remain on the noise coming out of Washington but also on Fed Chair Janet Yellen's Congressional testimony (on Tuesday and Wednesday) which is likely to repeat the message from the Fed's last meeting that it remains on track to hike further this year but that the process is likely to be gradual. Her response to questions regarding the impact of the new president will no doubt be watched closely but the Fed is basically in wait and see mode on that front. Expect headline CPI inflation (Wednesday) to 
have increased further to 2.4% year on year in January but core inflation to fall slightly to 2.1% yoy, solid growth in underlying retail sales in January, flat industrial production, continuing strength in the home builders' conditions index (all Wednesday) and flat housing starts (Thursday). December quarter earnings results will continue to flow.
Japanese December quarter GDP data (Tuesday) is expected to show growth at 0.3% quarter on quarter or 1.8% yoy.
Chinese inflation data for January (Tuesday) is likely to show a further rise in CPI inflation to around 2.3% yoy and a further uplift in producer price inflation to 6.5% yoy as the slump in commodity prices a year ago continues to drop out.
In Australia expect continued strength in business conditions according to the NAB's January survey, a bounce in consumer confidence (Wednesday) and January jobs data to show a 10,000 gain in employment but unemployment holding at 5.8%.
The Australian December half profit reporting season will ramp up further with 61 major companies reporting (including JB HiFi, CBA, Wesfarmers, Origin and Telstra). Earnings upgrades for resources stocks on the back of the rise in commodity prices has seen the consensus expectation for 2016-17 earnings growth rise to 17%. Resource company profits are expected to more than double, but profit growth across the rest of the market is likely to be around 5% led by retailers, utilities, telcos and building materials companies. Key themes are likely to be: a massive turnaround for resources companies; constrained revenue growth for banks and industrials; and an ongoing focus on dividends.
Outlook for markets
Shares remain vulnerable to a short term pull back as sentiment towards them remains very high, Trump related uncertainty will be with us for a while and various European elections could create nervousness in coming months. However, we see share markets trending higher over the next 12 months helped by okay valuations, continuing easy global monetary conditions, fiscal stimulus in the US, some acceleration in global growth and rising profits.
Still low yields and capital losses from a gradual rise in bond yields are likely to see low returns from bonds. Australian bonds are preferred to global bonds reflecting higher yields and as the RBA remains well behind the US in moving into a tightening cycle.
Commercial property and infrastructure are likely to continue benefitting from the ongoing search by investors for yield, but this demand will wane as bond yields trend higher over the medium term.
National capital city residential property price gains are expected to slow to around 3-4% this year, as the heat comes out of the Sydney and Melbourne markets and rising apartment supply hits.
Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.5%.
The $A has had a short term bounce as the $US corrected from overbought levels. This could go further and see a retest of $US0.78. However, the downtrend in the $A from 2011 is likely to resume as the interest rate differential in favour of Australia narrows &amp; it undertakes its usual undershoot of fair value. Expect a fall below $US0.70 by year end. 
<a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author">SHANE OLIVER</a> is head of investment strategy and economics and chief economist at <a href="https://www.ampcapital.com.au/home">AMP Capital</a> and is responsible for AMP Capital's diversified investment funds.
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RBA relaxed and comfortable, for now: Shane Oliver

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GUEST OBSERVER
Trump jitters dominated markets over the last week with his 90 day travel ban and reports of belligerent phone conversations with various country leaders (including Australia’s) and attacks on allies like Germany adding to concerns about inexperience and political and trade risk. 
So despite pretty good global economic and profit news, this saw most share markets dip and bond yields fall. Trump jitters along with a still gradual Fed also weighed on the $US which combined with news of a record trade surplus saw the $A rise. 
Worries about Trump could be with us for a while yet as his belligerent approach, his team’s inexperience and fears about trade wars and US isolationism could dominate the pro-growth positives for a while as it will take time to push through deregulation, tax cuts and increased infrastructure spending. 
While most of the global political focus has been on Donald Trump, Eurozone political risks will also feature this year. High on the list is France which has presidential elections in April and May. Polling continues to show that populist Eurosceptic Marine Le Pen will make it into the second round polling more than any other candidate at around 27 percent, but that the independent former economy minister Emmanuel Macron (polling at 23 percent) or the Republican party’s Francois Fillon (polling 20 percent) will defeat her in the second round (at 65 percent to 35 percent and 59 percent to 41 percent respectively).
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<img src="https://www.urban.com.au/images/2017/02/03/Screen%20Shot%202017-02-03%20at%201.54.37%20PM.png" alt="">
Both Macron and Fillon are pro Europe and reform oriented but Fillon has been hit by a scandal involving the employment of his wife and children as parliamentary assistants (which is legal but the issue is whether they actually worked). Whether its Macron or Fillon who makes the second round against Le Pen, it looks unlikely Le Pen will win the final round. But then again there is still several months to go and of course last year’s Brexit and Trump “upsets” can’t be ignored. As a result investors will worry about it and so French bond yields have been rising against German yields.
The 0.8 percent fall in Australian shares in January is not so positive in terms of the January barometer, which states that “as goes January so goes the year”. That said negative Januarys are less reliable a guide to the year as a whole than positive Januarys. Just recall last year! Since 1980 a negative January in Australian shares has gone on to a negative year only 31 percent of the time. Perhaps more importantly – given it impact on the direction of global and Australian shares – the US share market rose in January by 1.8 percent &amp; since 1980 a positive US January has gone on to a positive year 86 percent of the time.
Major global economic events and implication
Looking globally, business conditions PMIs continued to improve in January pointing to stronger global growth. Very different to a year ago when PMIs were heading down.
US economic data was strong with a further rise in ISM manufacturing conditions index, strong home price gains, solid consumer confidence and growth in personal spending, strong jobs data and a rise in pending home sales. That said wages growth according to the employment cost index remains modest and inflation according the core personal consumption deflator remains stuck around the same levels it’s been at for a year.
The Federal Reserve upgraded its comments regarding current conditions in the economy but there were no changes to the outlook and it continues to see interest rate hikes as being gradual. There was nothing pointing to a rate hike at its March meeting. We continue to anticipate three Fed rate hikes this year with the first being in May or June.
Over half of US S&amp;P 500 companies have now reported with 75 percent beating earnings expectations and 50 percent beating on revenue. Earnings are now expected to be up 5.6 percent from a year ago taking them to a new high, highlighting that the earnings recession that began in 2014 is long over.
Eurozone economic data was also solid with a pick-up in December quarter GDP growth and confidence and manufacturing conditions PMIs at five and a half year highs. While headline inflation rose solidly in December on the back of higher energy prices, core inflation remains stuck at 0.9 percent year on year suggesting that the ECB won’t be rushing just yet to taper its quantitative easing program.
Japanese jobs data was good with stronger than expected readings for household spending and industrial production. Meanwhile the BoJ left monetary policy on hold as expected.
Chinese manufacturing conditions PMIs fell in January but services conditions rose slightly, which points to continued solid growth into early this year.
Indian GDP rose 7.9 percent in 2016 and the Indian manufacturing conditions PMI bounced back suggesting the negative impact of demonetisation may be fading.
Australian economic events and implications
Australian data was a mixed bag. The NAB business survey showed strong business conditions in December adding to confidence that growth bounced back in the December quarter and the surge in iron ore and coal prices drove the trade balance to a record surplus in December. Against this though building approvals slipped further adding to evidence that they have peaked.
While the surge in commodity prices and the associated boost to national income won’t provide the same boost to the economy seen last decade (as tax cuts are less likely due to tougher budgetary conditions, the mining investment boom has already happened and its likely to be less durable) its better than falling national income and will provide some offset to the loss of momentum in dwelling construction.
Meanwhile, a continuing surge in credit growth to property investors in December and a strong start to the year in home price growth adds to concerns that the Sydney and Melbourne property markets remain too hot. If the RBA is to retain the necessary flexibility to cut interest rates again, another round of macro-prudential tightening by APRA is likely to be needed – perhaps lowering the 10% year on year growth threshold for the stock of property investor loans to say 7 percent.
What to watch over the next week?
In the US, apart from what President Trump may do, the main focus in the week ahead will be on December quarter earnings reports with over 100 major companies due to report. On the data front it will be pretty quiet with December trade data (Tuesday) expected to show an unchanged deficit and consumer sentiment and import price data due Friday.
Chinese trade data for January is expected to show a strengthening in import growth to around 5% year on year and a return to positive growth for exports at around 2 percent yoy.
In Australia, the focus will be back on the RBA (Tuesday) but it’s unlikely to make any changes to interest rates.
While the low September quarter inflation reading leaves the door wide open for another rate cut a move on Tuesday is unlikely as the inflation outcome was in line with the RBA’s own forecast and its likely to want to monitor the recent uptick in lending to property investors and see how the economy performs after its September quarter slump.
As a result all eyes will be on the post meeting Statement and the Statement on Monetary Policy to be released Friday.
Of most interest will be any revisions to the RBA’s forecasts, where we expect a downwards revision to the growth forecasts following the September quarter growth contraction and a possible pushing out in the return of inflation to target. Our assessment remains that - with record low wages growth, ongoing spare capacity, an
increasing risk that low inflation will feed on itself and the $A remaining too high - the RBA will cut rates again around May. Also of interest will be what the RBA has to say about the resurgent Sydney and Melbourne property markets – are they embarking on another round of discussions with APRA?
On the data front in Australia, expect a 0.2 percent rise in December retail sales and a 0.8 percent rise in retail sales volumes for the December quarter (Monday) and 0.5 percent rise in December housing finance (Friday) again driven by property investors.
The Australian December half profit reporting season will start to ramp up with 16 major companies reporting (including Rio, AMP, NewsCorp and Suncorp).
Steady earnings upgrades for resources stocks on the back of the rise in commodity prices has seen the consensus expectation for 2016-17 earnings growth rise to 17 percent from around 7 percent last September. Resource company profits are expected to more than double, but profit growth across the rest of the market is likely to be around 5 percent led by retailers, utilities, telcos and building materials companies. Key themes are likely to be: a massive turnaround for resources companies; constrained revenue growth for industrials; continuing constrained revenue growth for the banks; and an ongoing focus on dividends.
Outlook for markets
A further short term consolidation or correction in shares is likely as sentiment towards them remains very high, Trump related uncertainty will be with us for a while and as we enter the seasonally weaker month of February. However, we see share markets trending higher over the next 12 months helped by okay valuations, continuing easy global monetary conditions, fiscal stimulus in the US, some acceleration in global growth and rising profits.
Still low yields and capital losses from a gradual rise in bond yields are likely to see low returns from bonds. Australian bonds are preferred to global bonds reflecting higher yields and as the RBA remains well behind the US in moving into a tightening cycle.
Commercial property and infrastructure are likely to continue benefitting from the ongoing search by investors for yield, but this demand will wane as bond yields trend higher over the medium term.
National capital city residential property price gains are expected to slow to around 3-4 percent this year, as the heat comes out of the Sydney and Melbourne markets and rising apartment supply hits.
Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.5 percent.
<a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank">SHANE OLIVER</a> is head of investment strategy and economics and chief economist at <a href="https://www.ampcapital.com.au/home" target="_blank">AMP Capital</a> and is responsible for AMP Capital's diversified investment funds.
 
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Worries about Trump could be with us for a while: Shane Oliver

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GUEST OBSERVER
China records a comparatively strong finish to 2016, but Trump trade uncertainty adds downside risk to our moderate easing forecast for 2017.
China’s official national accounts data recorded a modest pickup in growth in Q4, with the economy expanding by 6.8% yoy (up from 6.7% recorded in each of the first three quarters). For the full year, growth was the slowest since 1990, but remains in line with a soft landing, as the growth model gradually shifts towards domestic consumption. 
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NAB’s forecasts for Chinese economic growth are unchanged – at 6.5% in 2017 and 6.25% in 2018. That said, we continue to note risks to these forecasts – most recently the uncertainty regarding US trade policy under the Trump administration, the high levels of corporate sector debt and risks of price bubbles in real estate markets (despite recent cooling in price growth).
China’s industrial production growth was marginally softer in December – at 6.0% yoy (compared with 6.2% yoy in November) – essentially remaining around recent trend levels. Recent trends in PMI surveys point to improved conditions for manufacturers since the midpoint of 2015.
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China’s fixed asset investment slowed considerably in December, despite real estate and manufacturing recording stronger growth. Construction activity is yet to show clear signs of slowing – with a fresh surge in construction starts in December – despite weakening house price and sales trends.
China’s trade surplus narrowed again in December, with import values recording a stronger month-on-month increase than exports. Commodity prices have surged in recent months – contributing to the rising trend in import values – with coal and iron ore prices remaining elevated. 
Export values fell in year-on-year terms, however the sizeable discrepancy between Hong Kong and Chinese trade data (due to unauthorised capital outflows disguised as trade activity in late 2015) makes underlying trends in trade flows extremely difficult to ascertain.
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<img src="https://www.urban.com.au/images/2017/01/24/Screen%20Shot%202017-01-24%20at%2012.42.07%20PM.png" alt="">
Growth in retail sales edged slightly higher in December, but stronger retail price inflation has kept real sales below 10% yoy.
China’s credit expanded strongly in 2016 – with new aggregate financing totalling RMB 17.7 trillion (an increase of almost 15% from 2015). This was the largest expansion on record (exceeding the previous peak in 2013). Managing the growth of China’s already considerable debt pile – comparable to higher debt advanced economy levels – remains a key challenge for Chinese authorities in 2017 and beyond. 
China’s official national accounts data recorded a modest pickup in growth in Q4, with the economy expanding by 6.8% yoy (up from 6.7% recorded in each of the first three quarters). This growth rate was slightly stronger than market expectations (at 6.7% in the Bloomberg survey).
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<img src="https://www.urban.com.au/images/2017/01/24/Screen%20Shot%202017-01-24%20at%2012.43.10%20PM.png" alt="">
For the full year, growth was the slowest since 1990, but remains in line with a soft landing, as the growth model gradually shifts towards domestic consumption.
The economic influence of the mid-year construction boom appears to have faded, with an acceleration in service sector growth across Q3 and Q4 – with services growing by 8.1% yoy (up from 7.8% in Q3). That said, property sales may have contributed to this trend – we will be looking closely at non-real estate and non-financial services data when this is released in the next few days.
NAB’s forecasts for Chinese economic growth are unchanged – we anticipate a slight easing in growth over the next two years, to average 6.5% in 2017 and 6.25% in 2018. That said, we continue to note risks to these forecasts – most recently the uncertainty regarding US trade policy under the Trump administration, the high levels of corporate sector debt and risks of price bubbles in real estate markets (despite recent cooling in price growth).
China’s industrial production growth was marginally softer in December – at 6.0% yoy (compared with 6.2% yoy in November) – essentially remaining around recent trend levels. This growth rate was below market expectations (at 6.2% yoy in the Bloomberg survey).
There was slower growth in construction related industrial products – with crude steel output rising by 3.2% yoy (down from 5.0% in November) and cement production falling by 1.2% yoy (compared with growth of 3.7% yoy previously). That said, at 67.2 million tonnes, crude steel output is not far below recent peaks.
Trends were more mixed in other industrial sectors. Motor vehicle output rose by 12.7% yoy (down from 17.8% yoy in November), electricity output was largely unchanged at 6.9%, and coal output was down 3.0% yoy. That said, coal production has risen considerably in recent months, following the easing of government imposed restrictions.
There was a slight divergence in trends in China’s main industrial surveys in December. The official NBS PMI survey was slightly softer, at 51.4 points (from 51.7 points in November) – albeit this level was the highest in over two years. In contrast, the Caixin Markit PMI pushed higher, to 51.9 points – the strongest reading since January 2013. Recent trends in these surveys point to improved conditions for manufacturers since the midpoint of 2015.
China’s fixed asset investment slowed considerably in December – with growth at 6.3% yoy (down from 8.3% yoy in November). The growth in state-owned enterprise investment – which surged across the middle of the year – slowed to 13.2% yoy (on a three month moving average basis) (down from 17.7% in November), while private sector investment has somewhat recovered from weak levels – at 5.0% yoy 3mma in December (from 4.3% previously).
Key sectors for fixed asset investment – such as real estate and manufacturing – recorded stronger investment growth in December – up by 10.0% yoy and 7.2% yoy respectively (on a three month moving average basis).
With real estate investment holding up, construction activity is yet to show clear signs of slowing – with a fresh surge in construction starts in December. Residential construction starts rose by 14.4% yoy (three month moving average) – up from -0.1% yoy in November, despite weakening house price and sales trends.
Official Chinese new house price data shows rose by 13.7% yoy nationally (compared with a peak of 14.0% yoy in November) – but just 0.6% month- on-month – the slowest rate of increase since February, and well below the 1.7% yoy peak across September and October. Growth in house sales has slowed – at 13.6% yoy 3mma in December (down from a recent peak of 38.8% in April) but the volume of sales has remained strong.
This suggests that it is still too early to know if policy restrictions introduced by a range of local governments are having a significant effect on the broader real estate sector – although recent price trends are encouraging. 
China’s trade surplus narrowed again in December, with import values recording a stronger month-on-month increase than exports. Overall, the surplus was US$40.8 billion (compared with US$44.2 billion in November).
China’s imports rose moderately in December – up by 3.1% yoy to US$168.6 billion (compared with US$149.3 billion in November). This result was in line with market expectations, with respondents to the Bloomberg survey anticipating a 3.0% yoy increase.
Commodity prices have surged in recent months – contributing to the rising trend in import values. The RBA Index of Commodity Prices rose by 42% yoy in December, with coal and iron ore prices remaining elevated. In contrast, import volumes rose comparatively modestly, up by 1.2% yoy (according to China Customs data).
Despite easing policy measures that restricted domestic coal production (which led to global coal prices falling from recent peaks), coal imports remained strong in December – up 52% yoy. We expect imports to decline in coming months, as domestic shipments pick up.
Other key commodities exhibited mixed trends. Crude oil imports rose by 9.6% yoy, while both iron ore and copper imports fell in December – down by 7.6% yoy and 7.7% yoy respectively. 
The value of China’s exports rose considerably month-on-month, to US$209.4 billion in December, but was well below the levels of a year earlier – down 6.1% yoy. This result was weaker than market expectations (at -4.0% in the Bloomberg survey), but may be subject to underlying data errors.
The confidence of exporters has remained relatively stable in recent months – with the new export order measure of the NBS PMI survey at 50.1 points (from 50.3 points in November) – a relatively neutral outcome.
<a href="https://www.propertyobserver.com.au/images/2017/01/24/Screen%20Shot%202017-01-24%20at%2012.44.10%20PM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/01/24/Screen%20Shot%202017-01-24%20at%2012.44.10%20PM.png" alt="">
Once again, the trends for exports by major trading partners were quite mixed – with steep falls in Asia contrasting with growth in the value of shipments to the United States. Exports to the US rose by 5.1% yoy (compared with 7.3% last month). Exports to the European Union fell by 4.7% yoy, while the value of exports to East Asia dropped by almost 14% yoy. 
Unauthorised capital outflows (disguised as trade flows) in late 2015 are distorting trade data. Exports to non-Hong Kong East Asia rose by 1.3% yoy in December, while exports to Hong Kong fell by over 26% yoy. The disparity between Hong Kong Customs and China Customs data was particularly stark in December 2015 – with Hong Kong reporting imports of just US$23.7 billion compared with China’s report exports of US$45.9 billion.
This discrepancy is larger than the year-on-year fall in exports for December 2016 – making underlying trends in trade flows extremely difficult to ascertain. 
Growth in retail sales edged slightly higher in December – increasing by 10.9% yoy (compared with 10.8% previously). Retail price inflation has been moving higher in recent months – resulting in weaker growth in real sales. Retail prices rose by 1.5% yoy – unchanged from last month – meaning that real retail sales growth was 9.3% yoy in December (up from 9.2% previously).
Consumer confidence was marginally weaker in December – at 108.4 points (down from 108.6 points) however this remains well within positive territory, and well above the neutral levels recorded in the early part of 2016.
China’s headline inflation was marginally softer in December – with the Consumer Price Index increasing by 2.1% yoy (compared with 2.3%% in November). 
Food price inflation was comparatively modest in December, with aggregate prices increasing by 2.4% yoy (down from 4.0% previously). This softer trend reflected much weaker price growth for fresh vegetables – at 2.6% yoy (compared with almost 16% last month). 
<a href="https://www.propertyobserver.com.au/images/2017/01/24/Screen%20Shot%202017-01-24%20at%2012.45.30%20PM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/01/24/Screen%20Shot%202017-01-24%20at%2012.45.30%20PM.png" alt="">
Non-food prices have continued to track higher in recent months, with prices rising by 2.0% yoy in December (up from 1.8% in November) – the strongest increase since November 2011. Fuel prices, utility costs and residence costs have all trended higher since the middle of the year.
Producer prices jumped in December – rising by 5.5% yoy (compared with 3.3% previously) – the strongest increase since September 2011. Commodity price trends had a major influence – with December 2015 marking the trough of the recent cycle. The RBA Index of Commodity Prices surged by 42% yoy in December (up from 27% in November). 
China’s credit expanded strongly in 2016 – with new aggregate financing totalling RMB 17.7 trillion (an increase of almost 15% from 2015). This was the largest expansion on record (exceeding the previous peak in 2013). The largest share of new credit was issued in the first half of the year.
Bank loans accounted for around two-thirds of China’s new credit in 2016 – totalling RMB 11.9 trillion. This level was around 11.8% larger than the previous year. Almost 60% of new bank credit was issued in the first half, while Chinese firms continued to pay down foreign denominated debt across the year.
Major components of the shadow banking sector – trust and entrusted loans – accounted for the second largest share of new credit at just over RMB 3.0 trillion. There was strong growth in shadow banking loans – particularly in the second half of the year – following on from two years of weaker activity due to regulatory pressures.
<a href="https://www.propertyobserver.com.au/images/2017/01/24/Screen%20Shot%202017-01-24%20at%2012.46.46%20PM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/01/24/Screen%20Shot%202017-01-24%20at%2012.46.46%20PM.png" alt="">
Corporate bonds also accounted for a significant share of new credit – at RMB 3.0 trillion, however growth in new net corporate bond issuance was minimal – at just 2.1% in 2016. While growth in corporate bonds was strong in the first half of the year, second half issuance was considerably weaker year-on-year.
Managing the growth of China’s already considerable debt pile – comparable to higher debt advanced economy levels – remains a key challenge for the Chinese authorities in 2017 and beyond. 
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Gerard Burg is an economist, on Asia, at the National Australia Bank. 
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Trump trade uncertainty adds downside risk to Chinese forecast: NAB's Gerard Burg

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The former property developer turned US President Donald Trump once considered opening a casino in Australia.
He was among the tenderers for the Darling Harbour Casino in 1986, partnering with the Queensland-based construction company Kern.
Five groups lodged tenders for the multi-million-dollar casino:
The Australian Federal Hotels and Sabemo group.
Malaysia's Genting Berhad, with Australia's Civil and Civic.
The US operator Harrah's, with Australia's Leighton and Pennant groups.
The US company Trump and Australia's Kern Corp.
HKMS, or the Hong Kong Macau Sydney consortium, backed by Dr Stanley Ho and a Hong Kong company, New World Enterprises, which owns developments in Kowloon.
The Government tender came afTer it refused to go through with a $610 million deal with the Hooker/Harrah's consortium after Cabinet was given adverse reports about individuals associated with both groups.
In mid-1987, on the eve of the casino decision, Trump indicated he didn't really care if he won the contract or not.
Trump told the New Jersey Casino Control Commission he was supposed to go to Sydney in early 1987 but "as the time got closer and closer, it sounded more and more less attractive".
"Eventually I decided it was just a long trip. So I don't know whether my enthusiasm level can be very high for that particular job.
"It's just a long, long trip away. I believe in very hands-on management," he told the commission, as reported in the SMH at the time.
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When Donald Trump toyed with opening Darling Harbour, Sydney casino

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GUEST OBSERVER
Yep, it happened. And now that the dust is settling, the challenges for Asia are becoming more evident. In sum, 2017 looks like it’ll be the most difficult for the region since 2009. It’s not, of course, entirely the President-elect’s fault – his administration, after all, hasn’t even outlined a detailed policy agenda yet, let alone taken the reins of power. 
Plus, Asia’s travails are partly self-inflicted. Still, if the past few weeks are any indication, things are bound to get a lot tougher. Trade is one thing, with exports already struggling and little prospect for a policy-driven rebound. The bigger issue, though, is the dollar and rates. Financial conditions are tightening across the region, putting a squeeze on domestic demand. It’ll get bumpier, still. 
As impressive as the rebound from the Global Financial Crisis has been, Asia has over recent years merely limped along. The taper tantrum of 2013 was a wake-up call, but the region managed to hit the snooze button for a little while longer, avoiding outright financial stress. 
But growth continued to decelerate, with exports in particular struggling to make meaningful headways since late 2014 and debt saturation weighing on local demand. It’s tempting to think that the latest market gyrations will pass, too, without more substantial harm. But, with every iteration, prospects dim further. 
Start with exports. These, as noted, have struggled for some time now. A combination of factors is to blame, including weak capex the world over, the commodity investment slump, creeping protectionism (or at least the absence of major trade liberalization over the past decade), supply chain disintegration, and an expenditure shift towards services. 
The question for 2017 is whether exports will at last rebound. We have our doubts. An acceleration in US growth should help. Yet this may be offset by continued sluggish demand elsewhere in the world, not least in emerging markets. 
The Trump administration may also help spur a recovery in US private capex, via deregulation and other, purportedly more business friendly policies. Yet it will take time before the full impact is felt, leaving this to be, presumably, more of a story for 2018 and beyond. 
Key to watch will be a deal with Congress to repatriate offshore cash holding by US companies, but it’s not clear that this in itself will send capex soaring if record-low rates previously failed to do so. A promised 1 trillion US dollar infrastructure push could help as well, if this will ever be passed by Congress in its entirety. But again: this too, will stretch out over many years. 
At the same time, a Trump administration may adopt a more protectionist stance. True, details aren’t available yet, apart from some vague talk about punitive action and the promise to shelve the TPP. 
This, no doubt, will restrain exports, even if the impact will likely be more industry specific. But note that uncertainty over trade policy in itself will promptly weigh on growth in Asia by curtailing investment (why invest in further capacity if it remains unclear that the resulting goods can be sold?). In this sense, a pick-up in US capex would partly come at the expense of investment spending in Asia. 
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It’s hard to see, therefore, a meaningful revival in Asia trade for the foreseeable future. 
However, the bigger issues, at least in the near-term, are US rates and the dollar. The spike in US yields has certainly caught markets by surprise. And, if these revert in due course, the damage might prove limited. But accelerating US growth, fuelled by more generous fiscal spending, could make it easier for the Fed to hike rates. 
In fact, HSBC’s chief US economist Kevin Logan, now expects three Fed hikes over the coming year (up from two). 
This amounts to a stiff headwind for Asian economies that have come to rely on rapid credit growth to sustain demand in recent years. Even China, still partly protected by capital controls, is not immune to this: with the PBoC possibly needing to forego, at the very least, further aggressive easing in order to stabilize FX demand. Elsewhere, rate cuts are also becoming a more remote prospect, such as in Malaysia where policy room is shrinking even as growth sags. 
Currency moves are compounding the effect. While exchange rate depreciation should, in principle, provide a boost to Asian exporters, the resulting tightening in financial conditions (higher rates) could more than offset the loosening of monetary conditions (weaker exchange rates). 
First, growth is currently hugely credit intensive and debt levels high, amplifying the drag of higher rates. Second, for the reasons cited, US import demand, despite accelerating growth, will likely be insufficient to compensate for this. Third, contrary to previous episodes of exchange rate weakness, the current FX sell-off is broad-based and, notably, includes the renminbi, thus leaving few Asian exporters with a meaningful gain in competitiveness. 
Challenging stuff. But the effects are not necessarily uniform across Asia. Indonesia, the Philippines, and India are likely to be more shielded from the “Trump effect” given their low debt and low export exposures. 
By contrast, Malaysia, China, Korea, Taiwan, and Thailand should more affected. The winner, if one can call it that, is the Bank of Japan, with the weaker yen taking the pressure off. But that’s not much of a consolation: Japan, too, will in the end need exports to do a lot better to cure its growth malaise. 
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Frederic Neumann is co-head of Asian Economics Research, HSBC, and can be contacted <a href="https://www.hsbc.com.au" target="_blank">here</a>.
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Trump effect soon to be felt in Asia

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On August 22, I wrote a note in which I concluded:
<ol>
<li>Record low interest rates have not been effective in stimulating investment to close the savings/investment imbalance. A change in policy from governments on infrastructure and structural reform is urgently required. 
</li>
<li>Central banks are exacerbating the imbalance with (quantitative easing (QE) policies. With these policies now generating negative yields and pressuring the banking system while sending confusing signals on risk free rates there is an urgent need for these policies to be reviewed and abandoned.} 
</li>
<li>When these QE policies are finally abandoned, as they surely must be, there will be a huge re-pricing of risk free assets with rates heading in the direction of nominal GDP growth, although the pace of this adjustment will still depend on the other progress which governments have made in closing the savings/ investment imbalance.</li>
</ol>
At that time the US 10 year bond rate was 1.54% while the Australian 10 year bond rate was 1.9%. Today these rates stand at 2.35% and 2.75% respectively.
I nominated nominal GDP growth in the US at around 4% (2% real growth and 2% inflation).
The US bond rate has risen about a third of the way towards what I would call that “equilibrium” despite no clear progress on lifting investment although, of course, markets are pre-emptive.
In the period 1992-2002 when we had more of an alignment between savings and investment, and bond rates were broadly in line with nominal GDP growth, we saw that investment in the US was growing at around 8% compared to the average growth rate in recent years of around zero.
The recent rise in bond rates can be considered in two periods – before and after the Presidential election.
The US bond rate started to rise from around late September from 1.55% to reach 1.85% on the eve of the US presidential election.
A key catalyst for that move was a change in tone from both the Bank of Japan (BOJ) and the European Central Bank (ECB). In the case of Japan policy was adjusted to target a level of the 10 year Japanese Government Bond (0%) rather than continuing to expand the balance sheet.
In the case of the ECB, prospects of further increasing the €80 billion of monthly asset purchases took a downturn and while there is no signal from the Board that tapering is imminent the debate around the effectiveness of QE and negative interest rates has been vigorous both in the market and amongst the officials.
Finally, I expect that markets believed that whoever was elected to the presidency we would see a measure of fiscal stimulus.
Since the election of Mr Trump, the US 10 year Treasury bond rate has risen from 1.85% to 2.35% - the total increase in bond rates, from the lows (80 basis points), represents about a third of the move towards my “equilibrium” target of 4% (250 basis points). As we expect with markets, this adjustment has occurred purely through a change in expectations. I would not expect this to progress much further until we see concrete evidence around progress on infrastructure and reform.
So what else in my “wish list” apart from a significant change in ECB and BOJ approaches has occurred?
The second part of the “wish list” was “change in policy from governments on infrastructure and structural reform”.
Do Mr Trump’s policies provide some comfort in that direction?
Recall that the first policy he referred to in his acceptance speech was to “rebuild” America. Given my emphasis on the need for aggressive infrastructure investment to lightening rod the US economy out of secular stagnation, I was impressed.
Until I looked into the details of his infrastructure policy. The current policy is to invest US$1 trillion (around 5% of GDP) in public infrastructure, over 10 years, with 85% to be financed from the private sector. Unless his team is aware of a massive list of public assets that could be privatised with the funds being used to finance the road/bridge/inner city spend, this policy is likely to fail due to a lack of support from the private sector.
My view is that he needs to redirect a large amount of the tax package towards direct infrastructure investment. The current tax package, which includes reducing the corporate tax rate from 35% to 15%, is estimated to cost (according to the <a href="https://crfb.org/donald-trump" target="_blank">Committee for a Responsible Federal Budget</a>) around US$5-6 trillion over 10 years. The corporate component is around 75% of the total package cost with the remainder representing the cost of lowering personal tax rates. But the <a href="https://www.taxpolicycenter.org/publications/analysis-donald-trumps-tax-plan/full" target="_blank">Tax Policy Centre estimates</a> that 47% of the benefits of the personal cuts will go to the top 1% of income earners.
The starting point for the total government debt position also threatens the tax package. When Reagan adopted his “supply side” economic policies, government debt stood at 24% of GDP compared to 78% today. The tax package could lift debt to around 110% of GDP over the next 10 years.
So my view on policy as it stands is that a much larger and realistic infrastructure package needs to be embraced at the expense of a significantly more modest tax package.
What about reform?
Reform is required to convince businesses that growth is in prospect and therefore investment should be lifted.
US firms pay US taxes on income generated anywhere in the world while allowing the firms to defer tax on these earnings by keeping the money offshore. Trump has considered offering companies a window tax “holiday” to repatriate some of the $2 trillion held outside the US. Such reform would 'spark' new investment if firms anticipated stronger growth in the US. An angle might be to 'link' the tax savings to the proposed private funding of infrastructure.
Currently there is some market belief in his claim to “clean up regulation”, with the unwinding of Dodd-Frank (a complex banking regulation) being the most comprehensive. Policies to unwind excessive regulation and some early successes in that regard will be just as crucial as a much more aggressive infrastructure policy to lift confidence in growth prospects.
The moderated approach to QE and negative interest rates by the ECB and BOJ started the move away from unrealistically low rates.
The emphasis in the Trump rhetoric on infrastructure and reform has been a very welcome development. However, at this stage, Trump’s policies do not signal a clear commitment to infrastructure and there does not appear to be a list of “achievable” reform initiatives.
Markets and firms will need to see clear evidence of Trump’s ability to implement ambitious policies before I could declare that we are on a steady path towards equilibrium and 4% bond rates.
Bill Evans is chief economist at Westpac.
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