Consumer sentiment slumps

OPINION: The US Fed looks less likely to cut interest rates

Opinion
Growth of the liquid milk category, both in the US and across Australasia provides further upside opportunities for the A2 Milk Company.

Growth of the liquid milk category, both in the US and across Australasia provides further upside opportunities for the A2 Milk Company.

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Despite two interest rate cuts, tax cuts, and stabilisation in house prices, people still aren't optimistic.

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GLOBAL equities were generally lower in the past week as stronger-than-expected US payrolls data reduced chances the US Federal Reserve will cut interest rates at its upcoming July meeting.

The better US economic data also saw bond yields higher in most of the major government bond markets. Reduced chances of interest rate cuts saw the US dollar stronger against a range of currencies, and the gold price weakened in line with the rise in the US dollar.

Australian consumer sentiment fell 4.1 per cent to a two-year low in July despite two interest rate cuts, tax cuts, and stabilisation in house prices. The index is down 9pc year-on-year with pessimists now exceeding optimists.

Australia's June NAB business survey showed that the bounce in business confidence after the May election was not sustained in June, with confidence dropping back from +7 to +2. On the other hand, business conditions were a little stronger, rising from +1 to +3, still below average but helped by stronger conditions in the construction, finance and housing sectors.

The Australian dollar has recently traded around US$0.70 - with rate cuts in Australia over the past month (and prospectively in the US) together with continuing uncertainty on trade tensions.

NAB has maintained its forecasts for the Australian dollar over the next two years with a slowing in near-term global growth, no near-term resolution to US-China trade tensions, and the risk of RBA cash rate cuts below the 1pc mark.

NAB still see some downward pressure on the US dollar over the next two years and any weakening in the Chinese economy due to ongoing trade tensions is likely to be offset by government stimulus, providing support to commodity prices.

Overall NAB sees the Australian dollar tracking in the mid-70 US cent range over the next year, before drifting slightly higher in the out year forecasts.

Consensus that A2 will be able to garner more share of the Chinese infant formula market has also bolstered its share price.

Consensus that A2 will be able to garner more share of the Chinese infant formula market has also bolstered its share price.

The A2 Milk Company Limited (A2M) share price has rallied 9.3pc (at time of writing) following consensus the company will be able to increase market share in the Chinese infant formula market. A shift in the distribution channel mix, away from daigou, will help A2M increase margin and develop a more sustainable model.

Growth of the liquid milk category, both in the US and across Australasia provides further upside opportunities for A2M.

This article does not take into account the investment objectives, financial situation or particular needs of any particular person. Before acting on any advice contained in this article, you should assess whether it is appropriate in light of your own financial circumstances or contact your financial adviser. Christopher Hindmarsh is an adviser at JBWere Limited.

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