Chief economist update: Surveys back All Ords climb

"Don't stop me now, I'm having such a good time
I'm having a ball
Don't stop me now..."
- Queen

Despite the ongoing uncertainty over the slowdown in global economic activity, the lingering trade war and now, geopolitical concerns (prompted by the developing US-Iran stoush), the Australian equity market keeps on climbing.

This year-to-date, the All Ordinaries index has rallied by 19.7%, outperforming both developed equities (+15.6%) and emerging markets (+10%). While the S&P 500 index hit an intraday all-time high on August 20, it's returned only 17.5% over the same period. The Euro Stoxx-50 index is up 15.8%; the FTSE-100 gained 10% and the Nikkei-225 index rose by a mere 6.2%.

Aside from the optimism brought on by the (near) bull market in Australian equities, recent surveys show there may be more where it came from.

The Australian Industry Group's (AiG) performance of services index jumped to a reading of 52.5 in May from 46.5 in the previous month - representing a return to expansion following four straight months of contraction.

While performance of manufacturing index slowed to 52.7 from 54.8 in April, it remains in expansionary territory (for the fifth straight month), with five of the seven activity indices in this sector indicating expanding conditions while two indicated broadly stable conditions.

More encouraging, the employment index in both the manufacturing and services sectors lifted in May from April and the continued expansion in new orders presages improving activity going forward.

This is consistent with the Commonwealth Bank of Australia (CBA) PMI survey. The flash estimate of the CBA composite PMI index rose from a reading of 51.5 in May to 53.1 in June - the strongest expansion since November 2018.

"Output and new business rose at the strongest pace in seven months amid reports of firmer underlying demand conditions. Also, workloads advanced solidly and employment increased for the second consecutive month," CBA states.

"On the prices front, input cost inflation rose to a seven-month high boosted by the exchange rate and higher prices of fuel and staff and output cost inflation advanced modestly. Finally, sentiment improved to its highest since January amid optimism following the federal election and new orders outlook."

The details show the services PMI rose to a seven-month high reading of 53.3 in June (from 51.5 in May) - supported by a steeper increase in new business - while the manufacturing PMI improved to a three-month high reading of 51.7 from 51.0, boosted by stronger new orders.

Both surveys (I assume) were taken before the RBA's 25 bps rate cut announced on June 4. The AiG and CBA made no reference to it in their reports.

The RBA's rate reduction would further boost the nascent improvement in the economy and with it, the continued rise in domestic equity prices.

Read more: CBAAll OrdsAustralian Industry GroupCommonwealth Bank of Australia
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