US Economy 'Holding Up Relatively Well,' IG Australia Says

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00:00I mean there is still uncertainty out there but one thing we do know is the US economy

00:03seems to be holding up relatively well.

00:06There were concerns in the lead up to last night's non-farm payroll data that we might

00:10see that unemployment rate spike to 4.3, possibly even 4.4 percent.

00:14All the labour market indicators bar jolts were suggesting there was some weakness inherently

00:19in the labour market but with that drop in the participation rate we actually saw the

00:23unemployment rate fall to 4.1 percent.

00:26And the headline number, the larger than expected job gains, the unemployment rate dropping,

00:31that's the number which people are going to remember in the weeks ahead and at 4.1 percent

00:35there's not too many concerns from that perspective.

00:37What is sort of opportunistically interesting to you at this point then?

00:42Well to me it's remarkable just how quickly Trump's bill passed.

00:46I think the base case there was it would be August, potentially September but it's the

00:51speed with which it's passed through Congress to land on his desk for signature later today

00:56is extremely impressive and I don't think the markets probably fully got hold of that

01:01at this point of time.

01:02So I see that as providing a boost in the weeks ahead because the timing as we mentioned

01:07was further back.

01:09It does remove some uncertainty, we speak about uncertainty, it does remove that uncertainty

01:14with regards to the debt ceiling and that's the headlines which we're not going to see thankfully

01:20again this year, push back until next year.

01:22And I guess in terms of the next big thing for markets is what happens with the July 9

01:26reciprocal tariffs deadline and you heard Trump coming out saying we're just going to send

01:31letters.

01:32I think potentially before that deadline we see a trade pact if you like with India and potentially

01:37Europe but others certainly showing less inclination to proceed Japan and South Korea for example.

01:44And I think that's just a case whereby it's a 10 percent minimum tariff potentially up towards 20

01:49percent and we'll deal with that as we see how it unfolds next week.

01:55Are there any sectors in the market or even just geographies that you could hedge this volatility?

02:00Absolutely. I mean, I think the core holding or the core view is that US equities and global equities in fact have

02:10taken on board a lot of bad news and the rally from the April lows has been imperious.

02:15The pullbacks have been shallow, they've been well supported and I think given the fact

02:19we've broken to new highs, given the fact that the US economy looks like it's holding up relatively well,

02:24given the fact we have this tax bill offsetting some of those tariff concerns,

02:28US equities can continue to rally into year-end, albeit on elevated volatility, given the fact

02:33we still have those uncertainties. As the hedge to that tail risk, which may come from something

02:39we are not yet aware of, I think the gold story remains very solid in terms of the dips lately.

02:45It's been well supported down towards 3,150-ish, 3,250-ish. I think that level will hold and we can

02:53see a push to new highs into year-end. Bitcoin, as another point of where there is opportunities,

03:01that correction which we've seen from the 112,000 high down to the recent pullback low around that

03:0898,000 area, it was very, very orderly. Again, there was a lot of bad news and it held together

03:14very, very well. And here we are, we're knocking on the door of record highs up around that $112,000

03:20area, sorry. Tony, where do the traditional havens like sovereign debt rank in this whole

03:29hedging situation? Because at the same time, we have so many fiscal concerns, whether it's the US

03:33or here in Japan, even with strong JGB auctions, we have seen yields continue to rise.

03:38We have to keep watching the JGB yields. That's certainly something we need to be mindful of,

03:44as well as the long end of the US yield curve there. With that bill passing, with the extra

03:49debt which it brings, the market hasn't really had an opportunity to vote on that yet, in my opinion.

03:54So obviously, the short end of the yield curve pushed up about 10 basis points overnight.

04:00The 10 years and the 30 years seem relatively well behaved at this point of time. So it's not

04:05something which we need to pull the trigger on right now, but have to keep an eye on those things,

04:09because that is probably where the bigger concern is. And also with regards to the US dollar,

04:14there's still some obviously concerns with whether people want to remain overweight US equities to the

04:21same extent they have been. Does that mean that we're going to see more hedging from portfolio managers,

04:26reducing their exposure to the US dollar? As Heidi mentioned earlier, the Aussies holding

04:31rock solid at 65 cents. And I think there's certainly concerns from the Australian portfolio

04:36manager community whether they should be lifting their hedges with regards to buying the Aussie

04:40dollar. And if they do make small adjustments to their hedging ratios here in Australia, that equates

04:45to billions of dollars of Aussie dollar, which needs to be bought. So these things need to play out

04:50over the coming weeks. But certainly the long end and sovereign debt needs to be monitored.

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