With Donald Trump sounding more presidential and magnanimous since his victory speech, markets have started partially pricing in what they regard as the more favourable parts of his policy agenda.

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September quarter Consumer Price Index (CPI) – Monetary policy implications: From a monetary policy perspective, the critical judgement to make was whether the September quarter CPI result provides the RBA with a catalyst to revise their inflation forecasts.

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Resource sector outperformance has been dramatic since most commodity prices troughed in early 2016. The impact of China’s fiscal stimulus in response to the pace of the slowdown through 2015 has been more supportive and longer lasting than generally expected.

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The relative Price-Earnings Ratio (PER) of the Bank sector to the Industrials excluding the Banks, REITs and Utilities has been substantially de-rated over the past 18 months. After an average discount of close to 25% over the past ten years the sector currently sits at a discount of around 40%, but given the change in the operating environment for banks, is this enough? Given the trends in likely EPS growth, probably not yet.

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The US economy enters the 8th year of economic recovery this quarter, with an Unemployment Rate of less than 5%. The prevailing 30 year fixed rate mortgage is again approaching late 2012 levels; the lowest seen in some 50 years.

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This is a political crisis with substantial economic consequences, largely for the UK. In our view, it is not a systemic financial crisis and is most unlikely to degenerate into one. Central banks are well placed to meet liquidity needs if required.

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The past week has seen a significant rise in the implied market pricing of a 0.25% US Fed Funds Rate increase at or before the July FOMC. The immediate catalyst was the publication of the April FOMC minutes (Wednesday, 18th May) which appear to adopt a more “hawkish” tone than most assumed from the Statement issued upon the conclusion of the meeting on 27 April.

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Policy easing in China has gained traction. Six interest rate reductions between November 2014 and October 2015, together with reductions in banks’ Reserve Ratio Requirements and some fiscal support, have seen China’s property market and heavy industries step up a gear.

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After discussion in recent months as to whether the likely sustainable trend rate of Australian economic growth has slowed, along came the December quarter National Accounts showing growth through 2015 had picked up to 3.0%. Certainly that helped rationalise the buoyant labour market in late 2015, but the weakness in wages growth and the relative strength in lower paid more labour intensive sectors of the economy is also a factor.

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The market did improve modestly in the second half of the month as excessive pessimism re US economic growth prospects were re-appraised, the domestic profit reporting season ended relatively mixed (although FY16 & FY17 consensus estimates were further reduced) and risk appetite improved in global markets.

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