ASX to catch Wall St’s bullish wave

AFR photo. generic ASX stock board shares investors investment portfolioThe local sharemarket, which has lagged overseas rivals so far this year, is poised to start the week sharply higher as Wall Street bulls shift into yet a higher gear.

The S&P/ASX 200 has risen a mere 1 per cent this month, lagging behind the 4.2 per cent advance in the Standard & Poor’s 500, the Nasdaq’s 4.7 per cent gain and the Dow Jones Industrial Average’s 5.3 per cent leap. The fast start to 2018 in New York has been reasonably broad based and there’s little evidence that the upward market melt is cooling.

Over the weekend ASX futures surged 31 points or 0.5 per cent. The n dollar topped US79?? as the greenback swooned.

A key test for local investors this week will be December’s employment print on Thursday, which will provide a fundamental check on November’s retail sales and December manufacturing.

The longest run of job creation since 1994 is set to continue, with the market expecting a 15,000 month over month gain, according to NAB, which sees “upside risks” given solid job advertising trends on job site SEEK as well as a “reassuringly steady” employment index in NAB’s monthly business survey.

NAB is expecting the economy to have added at least 35,000 jobs last month. The bank expects the unemployment rate to hold at 5.4 per cent, though NAB markets strategist Tapas Strickland said “the trend is firmly lower in 2018”.

“Trend employment growth currently exceeds the level needed to keep the unemployment rate unchanged and at +22k is enough for it drop 0.1 every 2-3 months,” Mr Strickland wrote in a weekend note. “The most recent employment indicators suggest it could fall below the RBA’s 5 per cent NAIRU in 2018.

“Our view of a continuing strong labour market is part of the reason why NAB sees the RBA hiking rates twice in the second half of 2018,” Mr Strickland also said. Bond market turning

It’s the prospect of higher global rates that has put investors on notice over this past week, reflected in part in the spike in US government yields; the 10-year yield hit a 10-month high last week and over the weekend the yield on the 2-year Treasury topped 2 per cent, its highest since the 2008 depths of the global financial crisis.

The yield moves lead Bill Gross to declare that a “mild” bear market had begun for bonds. But there’s not yet a consensus; Morgan Stanley strategists still see value in Treasuries.

Bank of Montreal chief economist Doug Porter attributed at least “some of the back-up in US bond yields” to “much more conventional, homegrown factors – a solid domestic economy, an uptick in inflation, and a rising budget deficit” – a reason why he agrees that “yields are more likely to rise than fall this year”.

Mr Porter is far from alarmist. Inflation is rising and could get a push from the recent leap in oil prices. The US government is going to start selling more debt in part to cover the cost of Republican tax cuts, at the same time as the Federal Reserve is planning to pare its $US4 trillion-plus ($5 trillion) balance sheet. There are no black swans here.

“Against this backdrop, one doesn’t need to concoct any stories about China trimming its purchases to make a bearish case for Treasuries,” Mr Porter said.

“The global economy is beginning to behave in a much more normal fashion, and so should monetary policy.”

To that point, and first off the rank on rates in 2018 is widely expected to be the Bank of Canada, which meets this week – Thursday morning AEDT. Governor Stephen Poloz is expected to announce a third 25-basis-point hike in its current upward cycle, lifting the bank’s target rate to 1.25 per cent.

Over the weekend, the latest US consumer price data bolstered bets that the Fed will lift its key rate by 25 basis points in March – the first of potentially three hikes in 2018. In the wake of the CPI data, TD Securities said it now sees three hikes as its base case for this year, up from two. That in turn led TD to lift its yield expectations on the short end of the US curve, up to five years, however it held its year-end 10-year yield forecast at 2.65 per cent.