Tag Archives: Economic Update

August Economic Update

By Robert Wright /August 28,2017/

MARKET AND ECONOMIC OVERVIEW

Australia

The RBA’s July interest rate decision was complicated by the recent strength of the Australian dollar, largely driven by a weaker US currency. The RBA noted that: “the higher exchange rate is expected to contribute to subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”.
The RBA continues to balance three key risks in the economy for their monetary policy deliberations: the outlook for inflation, the strength or otherwise of the labour market, and household financial stability.
In other news, Q2 CPI data came in at a softer 0.2% per quarter, reducing the annual growth rate to just 1.9% per annum, a drop of 0.2 percentage points. As a result, inflation is now just below the RBA’s 2–3% target band.
The average of the two underlying measures, the trimmed-mean and weighted-median, was 0.5% per quarter, in line with expectations, with the annual figure rising to 1.8%, a slight increase on the 1.75% reading in Q1.
The most significant price rises over the quarter were in medical and hospital services (+4.1%), new dwelling purchases by owner-occupiers (+0.9%), tobacco (+1.0%) and beer (+1.0%). The biggest offsetting price falls included domestic holiday travel and accommodation (-3.2%), automotive fuel (-2.5%) and fruit (-4.4%). Weakness continued in clothing, with price discounting and competition in the segment. The price increase expected in fresh fruit and vegetables as a result of Cyclone Debbie was largely offset by price declines in seasonally available fruit such as apples, bananas and mandarins.
The NAB business survey for June showed business confidence strengthening, up one point to +9. Overall business conditions rose to multi-year highs with a reading of +15, up from +11 in May on the back of stronger trading conditions and profitability.
The June labour market report saw job gains continue, although there was a return to a more normal monthly gain of +14,000. The unemployment rate held steady at 5.6%.
CoreLogic capital city dwelling prices regained momentum in July, rising 1.5% over the month to bring the annual growth rate to 10.5%. Prices in Sydney and Melbourne remain elevated, rising 12.4% per annum and 15.9% per annum respectively. The monthly price moves by capital city were: Melbourne (+3.1%), Sydney (+1.4%), Adelaide (+1.1%), Brisbane (-0.6%) and Perth (-1.3%). Strength in the housing market remains, despite signs of a slowdown in investment lending following tighter macro-prudential measures put in place in March.

United States

The US Federal Reserve Open Market Committee (FOMC) met on 25–26 July and, as was widely expected, left the Fed Funds rate range unchanged at 1.0% to 1.25%. This decision is consistent with the Fed waiting to see a little more data before continuing on the path to normalise US monetary policy.
The Fed noted that: “The labour market has continued to strengthen and… economic activity has been rising moderately so far this year. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand”.
The Fed also noted that: “near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely”.
Significantly, the Fed signalled that balance sheet adjustment will start shortly, reinforcing the general expectation that this will get under way at the next FOMC meeting on 20 September, provided the economy evolves broadly as the FOMC anticipates.
In other US economic news, newly released Q2 GDP data indicated a healthy rebound from weak growth in the first quarter. Real GDP rose by 2.6% on a seasonally adjusted, annualised basis, up from 1.2% in Q1. The improvement was underpinned by a 2.8% lift in consumer spending and a 5.2% increase in non-residential fixed investment.
Despite the better growth results, the ISM Manufacturing Index retreated, falling from 57.8 in June to 56.3 in July. New orders and employment fell, although they remain well above the long-term average.
US inflation was flat in June and once again weaker than expected, with the annual rate falling to 1.6% per annum, down from a peak of 2.7% per annum in February. Core inflation rose 0.1% per month and 1.7% per annum. Headline inflation remained suppressed, with weakness in energy prices, wireless phone services, and new and used cars. The Fed’s preferred measure of inflation, the Core Personal Consumption Expenditure Index, rose 0.1% per month and 1.5% per annum for June.
The labour market continues to perform well, with 222,000 jobs added in June, compared to 152,000 in May. Nonetheless, the unemployment rate rose to 4.4%, driven by a rise in the participation rate to 62.8%. Average Hourly Earnings also rose to 2.5% per annum, from a revised 2.4% per annum the month before.

Europe

The European Central Bank (ECB) met on 20 July and made no changes to policy. After the Bank moved to a more neutral view of growth risks and removed its asymmetric forward guidance on policy rates in June, there was some expectation that it may commit to a timetable for tapering its asset purchase program. But the ECB made no such commitment, instead deferring the decision to the northern hemisphere autumn and the next staff forecasts due in September.
Eurozone Q2 GDP data showed above trend growth of 0.6% for the quarter and 2.1% per annum, up from 1.9% per annum in Q1. But while this pick-up in growth has been reflected in better Euro area manufacturing PMI and services PMI data over recent months, The Markit Eurozone Manufacturing PMI retreated slightly in July, down from 56.8 to 56.6.
In better news, the Eurozone unemployment rate fell to new cyclical lows, falling to 9.1% in June, down from 9.2% in May. Headline inflation was also steady at 1.3% per annum for July, while core inflation rose to 1.2% per annum, up from 1.1%.
Greece returned to bond markets in July for the first time in three years, raising €3bn and issuing a 5-year bond that was twice oversubscribed with the yield set at 4.62%. While the credit rating for the newly issued bonds remains below investment grade, Standard & Poor’s raised its outlook for Greece from “stable” to “positive”, given recent cost cutting reforms and an expected return to economic growth.

United Kingdom

The Bank of England (BoE) did not meet in July, with the last decision on 15 June, where no policy changes were announced.
The BoE Board had a robust debate over the month on the future course of interest rates. The debate centred on the timing of moves to lift rates, while acknowledging that the economy doesn’t need as much stimulus as is currently being provided. Weak wages growth and uncertainty due to Brexit negotiations are likely to see the BoE hold off on rate rises in the near term.
UK headline inflation edged lower in June, with the annual rate down to 2.6% per annum from 2.9% per annum in May. Core CPI also retreated, falling to 2.4% per annum from 2.6% the month before.
The unemployment rate fell to a 42-year low at just 4.5% for the three months to May 2017, down from 4.6% in the previous three-month period. Unemployment fell 64,000 while employment climbed 175,000 as participation increased. Nonetheless regular earnings rose just 2% per annum.

New Zealand

The Reserve Bank of New Zealand did not meet in July. The cash rate has been on hold at 1.75% since 10 November 2016, when a 25-basis point rate cut was announced.
Q2 CPI was weaker than expected, staying flat over the quarter to bring the annual rate to 1.7% per annum, down from 2.2%. The lower-than-expected figure was driven by falling fuel, accommodation and transport prices. However, price pressures remain for construction costs and rents.

Canada

The Bank of Canada (BoC) announced on 12 July that it would raise its target for the overnight rate to 0.75%, as was widely expected. This was the first move in interest rates since the emergency rate cut to 0.5% in July 2015.
In raising the rate, the BoC noted that: “recent data [has] bolstered the Bank’s confidence in its outlook for above-potential growth and the absorption of excess capacity in the economy”.
Although the BoC acknowledged that inflation has stayed soft, a lag between monetary policy actions and future inflation drove the decision to lift rates.
The Canadian domestic economy was described as “robust, fuelled by household spending” and the BoC noted that “as a result a significant amount of economic slack had been absorbed”.
On the outlook for interest rates, the BoC noted: “future adjustments to the target for the overnight rate will be guided by incoming data as they inform the Bank’s inflation outlook, keeping in mind continued uncertainty and financial system vulnerabilities”.

Japan

The Bank of Japan (BoJ) met on 20 July and, as expected, made no changes to rates. It continues to maintain its policy balance rate at -0.1%, with a 10-year bond yield target of 0%. The BoJ pushed out the point when 2% inflation will likely be achieved to sometime “around fiscal 2019”.
The growth side of the economy is in better shape, with the BoJ upgrading its economic forecasts in July, as did the International Monetary Fund (IMF). They now expect growth of 1.3% in 2017, up from 1.2%.

China

In China, Q2 GDP data showed the economy growing at 1.7% per quarter and 6.9% per annum. While stronger than expected, this is the same annual growth rate as Q1 17. Monthly indicators also suggest stronger growth, with industrial production expanding by 7.6% per annum, up from 6.5%, and retail sales rising 10% per annum in the year to June, up from 9.6%. Healthy property and infrastructure investment, along with an easing in credit conditions, have helped build momentum in the economy.

AUSTRALIAN DOLLAR

After gains in June, the Australian dollar was stronger again in July, supported by rising commodity prices and expectations that the RBA could join other central banks in removing monetary policy accommodation, particularly after the Bank of Canada lifted rates. US dollar weakness was also evident as the market reduced the scale of future Federal Reserve rate hike forecasts on the back of weaker inflation data and reduced expectations of tax reform in the US given Congress’ failure to pass healthcare reform.

As a result, the Australian dollar rose 4.1% against the US dollar to $US0.8003, its highest level since May 2015.

The AUD also rose against the Sterling (+2.6%), the Euro (+0.4%), Japanese Yen (+2.2%) and NZ dollar (1.5%).

COMMODITIES

Commodity prices were generally higher in July, supported by a lower US dollar and further signs of a synchronised pick-up in global economic growth.

West Texas Intermediate (WTI) crude oil finished the month at $US50.17/bbl, up 9.0%. Gains were driven largely by a late-month fall in the US dollar and Saudi Arabia’s pledge to reduce crude exports.

Iron ore prices rose strongly in the month, with the spot iron ore contract (Qingdao 62% Fe fines) up by 13.5% to $US73.7/t. Stronger than expected economic growth figures in China and other industrial indicators helped propel the iron ore price higher.

Base metals were generally higher, with the London Metals Exchange (LME) Index rising by 4.4%. Nickel (+8.8%) and copper (+7.3%) rose strongly, helped by stronger Chinese economic data. Tin (+3.4%), lead (+1.8%) and zinc (+1.3%) also rose.

Precious metal prices were stronger, with gold up 2.2% to $US1269.44 an ounce. Silver rose 1.2%.

AUSTRALIAN EQUITIES

The S&P/ASX 200 Index finished the month flat (0.0%), despite some volatility. In a repeat of last month, there was considerable divergence in the performance between industry sectors.

With the Australian dollar continuing to rise against other major currencies, the biggest loser was Healthcare (-7.5%), since companies like CSL, Cochlear and ResMed derive a significant proportion of their earnings from overseas. Bond proxy sector Utilities (-5.3%) was impacted by rising bond yields, while Industrials (-2.9%) fell on a combination of a strong Australian dollar and rising bond yields. Telcos (-4.3%) were also dragged lower by sector giant Telstra, which has been under pressure on investor concerns around earnings and dividend risk.

On the positive side, the Materials sector (+3.5%) was strong on the back of rising commodity prices. Financials (+1.2%) were supported by the large banks, which rebounded after the better-than-expected ruling on capital requirements from APRA.

LISTED PROPERTY

The S&P/ASX 200 A-REIT index finished the month largely unchanged (-0.1%), having fallen by as much as 3.6% on global developments.

The industrial A-REIT sub-sector continued its run of longer term outperformance (+1.1%), again outpacing the retail (+0.6%) and office (-0.4%) sub-sectors over the month.

Among the better performing A-REITs in July were Vicinity Centres (+7.0%) and Rural Funds Group (+8.1%), whose investors supported a $78.6m capital-raising to strengthen the balance sheet. Vicinity announced a 5% buyback and asset revaluations, which boosted net tangible assets by 3.3%.

At the other end of the spectrum, Charter Hall Group (-5.6%) and Westfield Corporation (-4.4%) both fell over the month, with the market taking a dim view of Charter Hall entering discussions to purchase Westpac’s global infrastructure business, Hastings Management.

Listed property markets were stronger globally, with the FTSE EPRA/NAREIT Developed Index (TR) rising 1.9% in USD terms. Singapore was the top-performing region (+5.2%) and New Zealand the worst in US dollar terms, with the US in the middle of the pack at +1.0%.

GLOBAL DEVELOPED MARKET EQUITIES

Global developed equity markets recorded another positive month, as market volatility measures continued to fall to record lows.

The VIX Index, a market estimate of future volatility, reached a new low, falling to 9.36 on 21 July. Stronger global growth, good company earnings, large cash volumes on the sidelines and strong guidance from central banks helped to reduce volatility concerns, despite elevated political uncertainty in the US.

The MSCI World Index was up 2.3% in US dollar terms over the month, but down 1.5% in Australian dollar terms as the currency strengthened. The US dollar was weak in July and was one of the biggest factors impacting country specific returns.

In the US, the S&P500 (+1.9%), Dow Jones (+2.5%) and the NASDAQ (+3.4%) produced strong returns. MSCI Materials (+4.6%) outperformed following a rise in commodity prices, while MSCI Healthcare was flat as political uncertainty continued.

Equity markets in Europe were weaker, with falls in France (-0.5%) and Germany (-1.7%) driven by a strong Euro. In the UK, the FTSE100 rose 0.8% on signs the Brexit negotiations were progressing better than some had feared.

Asian markets were mixed, with the Japanese Nikkei 225 down (-0.5%), but Singapore (+3.2%) and Hong Kong (+6.1%) both making strong gains. Hong Kong was propelled higher by some Chinese property companies.

GLOBAL EMERGING MARKETS

Emerging market equities had another positive month, assisted by cyclical improvements in the global economy, commodity price gains and the weaker US dollar. The MSCI Emerging Market Index was up 5.5% in USD terms and 1.5% in AUD terms.

MSCI EM Latin America (+8.2%) rose strongly, helped by gains in oil and iron ore prices. MSCI EM Asia ex Japan gained 4.9% over the month, assisted by a 9% gain in MSCI China.

The MSCI EM Europe, Middle East and Africa was up 5.3%, led higher once again by oil prices, with Russia recording positive gains after falls in June.

FIXED INTEREST

July was a relatively stable month for bond markets, with more hawkish central bank themes being offset by continued political and geopolitical headline risks. The relatively low volatility speaks to both the resilience of markets and increasing confidence that global growth is on a healthier trajectory.

Central banks were hawkish, with the Bank of Canada increasing official interest rates for the first time since 2010, plus ongoing tapering discussions from the US Federal Reserve and European Central Bank. Geopolitical tension was driven by continued missile testing in North Korea and the response from other countries, the US in particular. US political uncertainty continued, with no progress on healthcare and ongoing headlines around the US presidency.

European 10-year yields rose 8 bps to 0.54%, but the US and UK were slightly down (1 bp to 2.29% and 3 bps to 1.23% respectively). The equivalent Japanese yields were flat month-on-month at 0.08%.

Australian government bond yields rose 8 bps to 2.68%. The rise was influenced by the release of minutes from the RBA’s Monetary Policy Board meeting, which were interpreted as overly hawkish.

GLOBAL CREDIT

Global investment grade credit spreads continued to tighten, but remain resilient despite wider market noise. While spreads are now the tightest since 2014, demand shows little sign of slowing down. Investment grade issuance in the US and Europe remained strong over the month.

The Bloomberg Barclays Global Aggregate Corporate Index average spread tightened by 7 bps to 1.02%. US credit also tightened, with the Bloomberg Barclays US Aggregate Corporate Index average spread closing 5 bps tighter at 0.98%. In Europe, the spread on the Bloomberg Barclays European Aggregate Corporate Index was 10 bps narrower at 0.92%, on the back of the ECB rhetoric.

US high yield credit spreads also tightened in July. The Bank of America Merrill Lynch Global High Yield index (BB-B) narrowed 16 bps over the month to 2.81%. The high yield market continues to be impacted by downgrades, particularly in the energy and mining sectors.

Australian credit spreads followed the global trend from recent months and moved tighter, with the average spread relative to swap on the Bloomberg Australian Corporate Index narrowing 5 bps 0.81%.

Source: Colonial First State.

MARKET UPDATE – MARKET AND ECONOMIC OVERVIEW

By Robert Wright /November 23,2016/

Australia

The Reserve Bank of Australia (RBA) Board met on 1 November 2016, as widely expected, the cash rate was held unchanged at 1.5%.
The statement remained largely similar to the October statement, with inflation still described as “quite low” and “…expected to remain low for some time”.
The RBA did however, tilt slightly dovish on the commentary around the labour market, noting that “employment growth overall has slowed”. This was slightly tempered by the observation that “forward-looking indicators point to continued expansion in employment in the near term”.
Q3 2016 Consumer Price Inflation (CPI) data was released and was slightly above consensus estimates. Headline CPI rose 0.7% per quarter and 1.3% per year, from 1.0% per year in Q2. Key drivers included increases in fruit (+19.5% per quarter), vegetables (+5.9% per quarter) and electricity (+5.4 per quarter) prices, this was partly offset by falls in telecommunication equipment and services (-2.5% per quarter) and fuel (-2.9%.qtr).
Underlying inflation, the RBA’s preferred measure rose to 0.4% per quarter, slightly down from 0.5% per quarter in Q2 2016. The annualised rate fell slightly to 1.5% per year from 1.6% per year. Both measures of inflation are still below the RBA’s 2-3% target band.
The September labour market report showed the unemployment rate decreased by 0.1% to 5.6%, driven by a 0.2% fall in the participation rate to 64.5%. The number of people employed fell by 9.8k below the +15k expected. The decrease was entirely driven by full time employment (-53k) while part time employment rose (+46k), continuing the recent trend towards flexible and part-time employment.
Consumer confidence increased over the month with the index up 1.1% to 102.4. The largest gains were seen in the Economy 1 year ahead (+5.8%) and consumer sentiment (+1.1%) components.

United States

The US Federal Open Market Committee (FOMC) met on 1-2 November 2016 and as widely expected, left the official Fed Funds target rate unchanged at 0.25%-0.5%. While the November meeting was never considered “live” given its proximity to the US Presidential Election, we and the markets continue to expect a rate increase at the 13-14 December FOMC meeting.
In detailing the policy decision, the Fed statement was little changed from that released at the time of the September FOMC – with the Fed continuing to signal that a rate hike at the 14 December FOMC is the base case.
The Fed’s statement repeated the view that “near-term risks to the economic outlook appear roughly balanced” and that they will continue “to closely monitor inflation indicators and global economic and financial developments”. Given this, the Fed noted that “the Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being to wait for some further evidence of continued progress towards its objectives”.
On inflation, the Fed upgraded their commentary a little, stating that inflation “has increased somewhat since earlier this year but is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports” and that “market-based measures of inflation compensation have moved up but remain low”.
The first estimate of Q3 2016 GDP was released at 2.9% on a seasonally-adjusted-annualised-rate, better than the 2.6% expected and an improvement on 1.4% in Q2 2016. The better than expected print was helped by a recovery in net exports and an increase in soy bean exports which contributed 0.9% to the headline figure.
Growth in Q3 saw a slowing in domestic demand with consumption (+2.1%, down from 2.7% in Q2), business capital spending (+1.1%) and government spending (+0.5%) all weak or slowing.
Employment was slightly weaker than expected in September increasing by 156K, but still more than enough to cover the estimated natural increase in the labour force. Despite this, the unemployment rate increased to 5.0%, from 4.9% driven by a 0.1% increase in the participation rate to 62.9%.
Inflation has picked up slightly. Headline CPI was up 0.3% in September, with the annual rate increasing to 1.5% per year. Core CPI increased 0.1% with the annual rate falling 0.1% to 2.2% per year. Inflation continues to be driven by shelter and medical costs, with energy (+2.9% per month) also contributing to the increase in headline CPI.
The Fed’s preferred measure of underlying inflation, the Core Personal Consumption Expenditure, was stable at 1.7% per year in September, around the level is has remained for most of 2016.

Europe

The European Central Bank (ECB) met on 20 October 2016 and left monetary policy unchanged, as largely expected.
ECB president Draghi dampened expectations that asset purchases would be tapered and reiterated the forward guidance that QE would continue at the monthly pace of EUR80bn until there was a sustained increase in the path of inflation consistent with the ECB’s objective.
The market is expecting an extension of the ECB’s QE program which is due to end in March 2017 at the December meeting.
The first estimates of CPI for the euro area in October showed an increase of 0.5% per year, the fastest since 2014. Core CPI was stable at 0.8% per year still well below the ECB’s 2% target. Inflation was aided by the increase in oil prices over the last year with energy prices down -0.9% per year in October compared to -3% per year in September. Services remain the main driver of inflation at +1.1% per year.
The political deadlock in Spain ended over the month with Mariano Rajoy of the centre right Peoples Party sworn in a PM after winning a confidence vote, ending a 10 month period with no government.

United Kingdom

The Bank of England (BoE) Monetary Policy Committee did not meet in October; the next meeting is scheduled for 3 November 2016.
Over the month it was confirmed that the BoE governor Mark Carney would leave his role in 2019, before the end of the full 8 year term (2021), but long enough to see the UK through the Brexit. The decision appears to be due to personal/family reasons and not political pressure as speculated.
Q3 2016 GDP was better than expected increasing by 0.5% per quarter with no sign yet of a “Brexit” slowdown. The annual rate increased to 2.3% per year. Growth was entirely driven by service (+0.8% per quarter), while industrial production (-0.4% per quarter) and construction (-1.4% per quarter) slowed.
CPI data showed inflation increased by 0.2% in September, driven in part by rising oil and core goods inflation. The annual rate of inflation increased to 1.0% per year from 0.6% per year while core inflation increased to 1.5% per year from 1.3% per year. Rising oil prices and a lower currency are expected to continue driving inflation higher over the next year.

New Zealand

The Reserve Bank of New Zealand did not meet over October; the next meeting will be held on 10 November 2016.
Q3 2016 CPI was stronger than expected at 0.2% per quarter and 0.2% per year, down from 0.4% per year in Q2 2016 and still well below the RBNZ’s target of 1-3% on average over the medium term.

Canada

The Bank of Canada left rates unchanged at 0.5% at their 20 October 2016 meeting.
September CPI increased by 0.1% while the annual rate rose to 1.3% per year from 1.1% per year. Core inflation was stable at 1.8% per year.

Japan

The Bank of Japan’s met on 1 November 2016 and left monetary policy unchanged as widely expected.

China

The People’s Bank of China left monetary policy unchanged during the month with no rate cuts or reserve requirement ratio easing.
Q3 2016 GDP released in October showed growth once again stable at 6.7% per year, the middle of the 6.5%-7% target band where it has remained for all of 2016.
Inflation increased in September for the first time since February, rising to 1.9% per year from 1.3% per year in August. Food price inflation continues to be the major driver of inflation, rising to 3.2% per year in September from 1.3% per year in August.
Chinese producer prices as measured by the PPI increase 0.1% per year in September, the first increase since 2012 and up from -5.9% per year one year ago.

AUSTRALIAN DOLLAR

The Australian dollar (AUD) strengthened against most major currencies over October. The AUD was down 0.7% against the USD to $US0.7608, but rose against the euro (+1.85%), the sterling (+5.42%), yen (+2.90%) and NZ dollar (+1.18%).

Improving commodity prices and terms of trade over the month supported the currency.

COMMODITIES

Commodity prices were mixed over October with metals varied and weakness in energy, except coal which saw significant increases.

The price of West Texas Intermediate Crude finished the month at $US46.86 per barrel down 2.9%, while the price of Brent was down 4.2% to $US48.61 per barrel. Oil prices rose early in the month, around optimism that a potential OPEC deal would reduce excess supply. Before falling in the last week of October as the market realised any production cuts would be difficult to achieve and would likely exclude key OPEC producers (Iran, Iraq, Nigeria and Libya).

Increasing activity in the US energy sector also weighed on markets with US rig counts now up nearly 40% from the lows reached in May this year.

Gas prices were mixed with the US Henry Hub spot price down 7.9% to $US2.79/MMBtu while the UK natural gas price was up 18.5% over August.

Iron ore prices were stronger over October, up 15.3% to $64.38/metric tonne, as measured by the benchmark price of iron ore delivered to Qingdao China, the highest level is May 2015.

Coal was the best performing commodity over the month with increasing demand from China, due to domestic mine closures, pushing prices higher. The price of Newcastle thermal coal increased 50.4% to $108.6 per metric tonne over the month.

Zinc (+3.4%) and Aluminium (+3.6%) rose over October while Nickel (-0.9%), Lead (-2.8%), Gold (-3.3%) and Copper (-0.2%) were all weaker.

AUSTRALIAN SHARES

The ASX/S&P 200 Accumulation Index lost 2.2% during October, with most industry sectors finishing the month lower. Health Care (-8.3%) was among the worst performers, dragged lower by industry heavyweight CSL.

Bond proxy sectors continued September’s decline, as the market reacted to rising bond yields and a potential rise in US interest rates. AREITs (-7.9%) and Utilities (-3.0%) once again underperformed the broader market.

Energy (-2.3%) started the month strongly, but finished lower as doubts surfaced around OPEC’s commitment to cut production. Whitehaven Coal had another strong month on the back of rising coal prices, adding to the 333% share price appreciation since the start of 2016.

Materials (1.3%) outperformed the market with strong performances from Fortescue Metals and Rio Tinto, which benefitted from a strengthening iron ore price.

Financials (0.7%) edged higher, led by banks as sentiment towards the sector improved. Banking stocks typically enjoy investor interest during October, as three of the big four banks go ex-dividend in the first half of November.

LISTED PROPERTY

The S&P ASX 200 A-REIT index continued its recent decline, falling by -7.9% in October. Higher bond yields dampened sentiment towards REITs and other income-oriented investments.

Office A-REITs held up relatively well on the view that robust leasing demand from the financial services, legal and technology sectors would support Sydney and Melbourne’s office markets.

The best performing A-REITs were Charter Hall Retail REIT (-1.9%), which stabilised following steep declines in August; and Dexus Property Group (-2.3%), which held an investor day and provided a first quarter update.

The worst performing A-REITs were Iron Mountain (-12.1%) and Scentre Group (-10.4%). Although neither company announced material news, broader sector underperformance weighed on both stocks.

Listed property markets offshore also dipped in October. The FTSE EPRA/NAREIT Developed Index (TR) fell by -5.7% in US dollar terms. Despite ending the month lower, Hong Kong (-1.3%) was the best performing region for a third consecutive month, followed by Japan (-1.4%). Property securities in Continental Europe and the UK lagged.

GLOBAL SHARES

Global share markets were mixed over October with weakness in the US and strength in Japan and European peripheries. Volatility continued over the month as markets reacted to changes in the oil price, political concerns in the US and the prospect of a Fed rate hike in December.

The MSCI World Index was down 2.0% in US dollar terms in the month of October and -1.3% in Australian dollar terms.

In the US, the S&P500 (-1.9%), the Dow Jones (-0.9%) and the NASDAQ (-2.3%) were all weaker, driven by broad market weakness. While earnings largely beat (reduced) expectations, the results were more “less bad” than good.

US markets also stumbled at the end of the month as it was revealed the FBI had found more Clinton emails in a separate investigation.

On a sector basis, MSCI Financials (+2.13%) was the best performer, as bank stocks climbed with rising yields. MSCI Health Care (-6.94%) was the worst performer as political noise around drug pricing and earnings concerns of medical device companies carried over to the rest of the sector.

Share markets in Europe were stronger over the month. The large cap Stoxx 50 Index rose 1.8% driven by strong performance in the periphery, with Greece (+4.5%), Italy (+4.4%) and Spain (+4.1%) all stronger. Elsewhere the UK FTSE100 (+0.8%), France (+1.4%) and the German DAX (+1.5%) all rose.

Asia markets were mixed with the Japanese Nikkei 225 (+5.9%) and Taiwan (+1.3%) up while Singapore (-1.9%) and Honk Kong’s Hang Seng (-1.6%) fell.

GLOBAL EMERGING MARKETS

Emerging market shares were almost flat over October in USD terms with the MSCI Emerging Market Index up 0.2%, outperforming DM equities.

Despite the 3% rally in USD index and higher US yields emerging markets performed well in local currency terms aided by the pick-up in key commodity prices.

MSCI EM Latin America was the best performing region over the month rising 9.72% in USD terms with a strong rebound in Brazil (+11.2%) driven by positive political developments.

MSCI EM Europe, Middle East and Africa (-0.28%) and MSCI EM Asia (-1.54%) underperformed.

The Shanghai Composite Index was stronger, up 3.2% on stable Chinese growth and stronger domestic consumption.

Source: Colonial First State.

February Market Update

By Robert Wright /March 08,2016/

MARKET AND ECONOMIC OVERVIEW

Australia

The Reserve Bank of Australia (RBA) left the official cash rate on hold at 2% on 1 March 2016 – where it has remained since May 2015.
Labour market data continued to surprise on the positive side, although there are some data quality issues. The official seasonally-adjusted data showed 1,000 jobs were lost in December, above the -10,000 the market expected after a revised gain of 74,900 jobs in November. This takes the Q4 total to 128,900 and the total for 2015 to 295,300, the highest since 2007.
The unemployment rate remained at 5.8% in November, well below its most recent peak of 6.4% in January 2015.
The largest gains in inflation were in Alcohol and Tobacco (+2.7% per quarter) primarily driven by an increase in the federal excise tax on tobacco and the Clothing and Footwear group (+1.6% per quarter), due to gains in accessories prices (+4.5% per quarter). Offsetting the gains were price falls telecommunication equipment and services (-2.4% per quarter) and the Transportation group (-1.4% per quarter) due to a 5.7% per quarter fall in fuel prices.
Perhaps more importantly, both measures of underlying inflation showed a slight acceleration in the pace of price rises with underlying inflation increasing by 0.55% per quarter, which was the average of the trimmed mean and weighted median measures. This took the annual pace of underlying inflation to 2.0%, down from 2.1%.

United States

The US Federal Open Market Committee (FOMC) met on 26 to 27 January 2016 and decided to leave the official Fed Funds target rate at 0.25% to 0.50% as was widely expected.
The statement highlighted that “labour market conditions improved further even as economic growth slowed late last year” and presented a moderate but mixed view of the economy “household spending and business fixed investment have been increasing at moderate rates in recent months, and the housing sector has improved further; however, net exports have been soft and inventory investment slowed”.
The next meeting will be held on 17 to 18 March 2016.
The first estimate of Q4 2015 GDP was released indicating growth was 0.7% on a seasonally-adjusted-annualised-rate, below expectations and lower than the 2% recorded in Q3 2015. Personal spending rose 2.2%, while net exports and inventories each subtracted 0.5% from GDP. Overall for 2015, the US economy grew by 2.4% for the second straight year.

Europe

The European Central Bank (ECB) met on 21 January 2016 with no changes to monetary policy announced. The ECB last made changes in December 2015 when the interest rate on the deposit facility was cut by 10 basis points to -0.30% and the asset purchase program (APP) was extended until the end of March 2017 with the ECB noting at the January meeting that the “decisions were fully appropriate. They will result in a significant addition of liquidity to the banking system and will strengthen our forward guidance on interest rates”.
The estimate for CPI inflation in January was 0.4% per year for headline and 1.0% per year for core inflation, both up marginally from December.

United Kingdom

The Bank of England (BoE) left policy unchanged when it announced its decision on 14 January 2016, as expected. The Bank Rate was unchanged at 0.5% and the stock of asset purchases remained at £375bn. There was one dissent on the nine member board, the sixth meeting in a row.
The advance estimate for Q4 2014 GDP was 0.5% per quarter and 1.9% per year, down from 2.1% per year with growth driven all by the services sector.

Japan

The Bank of Japan’s (BoJ) policy board convened on 29 January 2016 and added a new dimension to their policy armoury by lowering by 20bps one of its new three-tiered policy rates to -0.1%. The BoJ has labelled the policy action “Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate”.
The BoJ, led by Governor Kuroda, was likely prompted into action in response to the weaker inflation data, with headline inflation of just 0.2% per year recorded for December, well below its 2% inflation target. Recent Yen strength would also have been a concern for the BoJ, (signalling their unwillingness to tolerate JPY/USD below 120), as well as also wanting to break recent deflationary trends ahead of the upcoming wage negotiations.

AUSTRALIAN DOLLAR

The Australian dollar was mostly weaker against the major cross currencies in January. The AUD finished down 2.8% against the USD to $US0.7084. These losses occurred despite reduced expectations of the US Federal Reserve continuing to raise interest rates in 2016.

The Australian dollar fell against the euro (-2.5%) and yen (-2.1%) and rose against sterling (+0.5%) and NZ dollar (+2.5) over the month of January.

COMMODITIES

Commodity prices were weaker in January driven by renewed signs of weakness in China and continued global oversupply.

The price of West Texas Intermediate Crude finished the month at $US33.6/bbl, down 9.2%, while the price of Brent was down 6.6% to $US36.0/bbl.

Gas prices continue to follow lower oil prices with the US Henry Hub spot price down 2.6% to $US2.31/MMBtu and the UK natural gas price down 13.9% over January.

Iron ore prices were weaker in January, down 4.2% to $41.7/metric tonne, as measured by the benchmark price of iron ore delivered to Qingdao China – 62% Ferrous Content.

Copper (-3.1%), lead (-4.2%) and nickel (-2.3%) fell in January, while Gold (+5.2%), Aluminium (+0.8%) and Zinc (+0.9%) made gains.

AUSTRALIAN EQUITIES

It was a disappointing start to the new year for Australian equities, with the S&P/ASX 200 Accumulation Index closing January 5.5% lower.

The Index was led lower by stocks in the Financials sector. ANZ Banking Group declined in value by 13.4%, for example, while the other three ‘big banks’ all closed the month around 8% lower.

Most materials stocks announced quarterly updates too. BHP Billiton (-14.1%) announced it will recognise a post-tax impairment charge of ~$7 billion against its onshore US energy assets. Oil and gas prices have been significantly weaker than BHP expected and have affected the company’s assessment of asset value.

Woolworths (-0.9%) announced it intends to exit the home improvement market via a sale or shutdown of its loss-making Masters business. Health care company Resmed (+8.2%) announced interim results that highlighted ongoing market share gains.

Most other ASX-listed companies will announce their results for the six or 12 months ending 31 December during February.

LISTED PROPERTY

The defensive nature of property securities again enabled the sector to outperform. Despite a >5% decline in the broader Australian share market, the S&P/ASX 200 Property Accumulation Index added 1.1% as investors focused on the relative stability of stocks in the sector.

Companies in the Retail sub-sector continued to perform relatively well. This area of the market has been supported recently by Australian dollar weakness. Currency movements have reduced the appeal of online shopping from overseas and underpinned sales growth from retail stores in Australia. The lower dollar is also seeing an increase in tourist numbers to Australia, further supporting the domestic retail sector. Stocks including Scentre Group (+3.8%) and Vicinity Centres (+3.9%) have benefited from these themes.

Global property securities struggled in January, with the FTSE EPRA/NAREIT Global Developed Index declining 4.3% in US Dollar terms. The Hong Kong (-12.5%) market performed particularly poorly, although the UK (-9.3%) also remained weak following disappointing performance in December. In fact Australia generated the best return among major global property regions.

GLOBAL DEVELOPED MARKET EQUITIES

Global financial markets had a volatile start to 2016, with most equity markets recording sharp losses in January. Falls were prompted at the start of this year with weaker manufacturing data in China and the US and political tensions between Saudi Arabia and Iran. These initial reasons for equity market falls were exacerbated by ongoing volatility, indiscriminate selling, sharp falls in the oil price and further Renminbi weakness due to a lack of policy coordination and communication in China.

On 19 January 2016 the IMF downgraded its assessment of global growth to 3.4% from 3.6% in 2016 and in 2017 to 3.6% from 3.8%.

With large volatility in equity markets and signs of downside risks to global growth, there was renewed speculation over central bank policy announcements with further easing measures expected. On the last trading day of the month the Bank of Japan surprised markets by introducing negative rates to its already aggressive expansion in monetary base.

The MSCI World Index fell by 6.1% in US dollar terms in the month of January, and 3.3% lower in Australian dollar terms.

Equity markets in Europe were also substantially weaker. The German DAX (8.8%), Italy (-12.9%), Spain (-7.6%) and France (-4.7%) all fell. The UK FTSE 100 was down 2.5%.

In Asia, the Japanese Nikkei 225 fell 8.0% despite gains on the last day of the month after easing measures by Bank of Japan, while Singapore (-8.8%), Taiwan (-2.3%) and Hong Kong (-10.2%) were mixed.

GLOBAL EMERGING MARKETS

Emerging market equities were weaker in January, with the MSCI Emerging Market Index down 6.5% in US dollars and 3.8% in AUD terms. Concerns around weaker Chinese growth and the continued fall in commodity prices contributed to these losses with all regions recording falls, led by MSCI Asia Ex Japan, down 7.7%. The Shanghai Composite Index fell 22.6% over January. MSCI EM Latin America fell 4.7% while MSCI EM Europe, Middle East and Africa was down 4.2% in US dollar terms.

Over the month, global credit spreads traded notably wider however this was more due to the fall in government yields than changes in credit yields. Overall, the Barclays Global Aggregate Corporate Index average spread were 24 bps wider in the month, closing at 1.83%. The Barclays US Aggregate Corporate Index average spread finished the month at 1.81%, widening by 26 bps and the Barclays European Aggregate Corporate Index widened by 16 bps to 1.50%.

Volatility continued in the US high yield credit market with weakness from the Energy and Materials sector resulting in a widening of spreads in the month. The Bank of America Merrill Lynch Global High Yield index (BB-B) spread moved 66 bps wider at 6.19%. In Asia, credit markets followed the global widening trend with the JPMorgan Asia Credit Index (JACI Composite) average spread out by 27 bps to 3.31%.

Australian credit spreads widened in the month. However, activity remained cautious as numerous factors kept investors on the fence including the holiday season, concerns over China’s growth outlook amid heightened market volatility, and dollar depreciation. The average spread of the Bloomberg AusBond Credit Index relative to swap increased marginally from 115 bps to 118 bps.

Source: Colonial First State.

Note: The official cash rate is current as at 1 March 2016. Remaining information current as at 8th February 2016.

Economic Update

By Robert Wright /July 03,2015/

MARKET AND ECONOMIC OVERVIEW

Australia

The Reserve Bank of Australia (RBA) cut the official cash rate from 2.25% to 2.00% on 5 May; this was largely expected by financial markets. The RBA subsequently left the official cash rate on hold on 2 June.
The RBA noted that “the global economy is expanding at a moderate pace” but commodity prices have declined over the past year, generally reflecting increased supply. On Australia, the RBA noted “the available information suggests improved trends in household demand over the past six months and stronger growth in employment”. The key drag on growth will be weakness in business capital expenditure in both mining and non-mining sectors and subdued public spending.
On the Australian dollar (AUD), the RBA noted “further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices” and “the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand”.
The RBA also released its quarterly Statement on Monetary Policy and downgraded its GDP growth forecasts. For June 2015, growth was downgraded to 2%, for December 2015 to 2.5% and as at December 2016 to 2.75% – 3.75%.
This indicates the Australian economy will remain below trend for longer than had been anticipated in February 2015 when forecasts were last published. Downgrades were largely driven by a later pickup in non-mining business investment and will eventually be helped by a lower currency and above average consumption growth.
Inflation forecasts were also revised a little lower due to weaker product and labour markets, the unemployment rate is now forecast to peak around 6.5%.
The 2015/16 Commonwealth Budget was handed down, with a deficit estimate of A$35.1bn, 2.1% of GDP. This compares with a deficit of A$41.1bn, 2.6% of GDP, in 2014/15. The Budget deficit will slowly improve to A$6.9bn in 2018/19, before a return to surplus currently expected in 2019/20.
The unemployment rate edged up to 6.2% in April, with 2,900 jobs lost. Annual employment growth is now 1.5%, a reasonable result given below-trend economic growth.

United States

The US Federal Open Market Committee (FOMC) did not meet in May, with its next meeting scheduled for 16-17 June 2015. Attention is on the first interest rate hike, currently expected in September 2015.
In May, the Federal Reserve System (the Fed) Chair Janet Yellen delivered a speech titled ’The outlook for the economy’ and noted “one sign of a stronger labor market is that the number of job openings has risen impressively, and another is that more workers are quitting their jobs, signalling greater confidence in their ability to find a new job. I say ‘approaching’, because in my judgment we are not there yet”.
Yellen also noted: “if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy” and “to support taking this step, however, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term”.
On employment, there were further positive signs in the month with the unemployment rate falling to 5.4% in April with 223,000 jobs added. This is the lowest unemployment rate since May 2008 and coincides with a 15 year low in initial jobless claims and a 14-year high in job openings.
However, inflation remains weak. Headline inflation fell to -0.2% per year in April, largely driven by lower gasoline prices and a stronger US dollar.

Europe

The European Central Bank (ECB) did not meet in May, with the next meeting scheduled for 3 June 2015. The ECB however, did announce it bought public and private assets worth €63bn in May under its expanded asset purchase programme. This takes the total of the public sector purchase programme holdings to €146.7bn at the end of May.
Negotiations were ongoing with Greece over the month to disburse bailout funds under its current program. No progress has been made after five months of negotiations. Greece has €1.7bn of payments to the International Monetary Fund due in June, with a deal required at some point over the month to disburse funds required for this repayment. The main sticking points for a deal remain pension and labour market reform and budget surplus targets.
Economic data released included flash estimates of Q1 2015 GDP, with overall growth in Europe recorded at 0.4% per quarter and 1.0% per year. Spain, France, Germany and Italy all grew, while Greece contracted by 0.2% per quarter with the economy recording growth of just 0.3% per year.

United Kingdom

The Bank of England (BoE) left policy unchanged at its 11 May 2015 meeting, as expected. The Bank Rate was unchanged at 0.5% and the stock of asset purchases remained at £375bn.
The UK General Election was held on 7 May 2015 and in somewhat of a surprise David Cameron and his Conservative government was re-elected with a majority. The final results were The Conservatives (330 seats), Labour (232), the Scottish National Party (56), the Liberal Democrats (8) and the United Kingdom Independence Party (1).
One outcome from the election was the commitment to hold a referendum on European Union membership in the next two years.
The unemployment rate fell to 5.5% from 5.6% with 202,000 jobs added in the three months to March.

Japan

The Bank of Japan’s (BoJ) policy board convened on 22 May 2015 and left its qualitative and quantitative easing (QQE) program at an annual increase of Y80trillion to its monetary base. BoJ Governor Kuroda sees inflation reaching 2% in H1 2016, but won’t hesitate adjusting policy if needed.

China

The Peoples Bank of China (PBOC) cut the 1-year lending rate to 5.1% from 5.35% on 10 May 2015. This is the third rate cut since November 2014. The PBOC also raised the ceiling for deposit rates to 1.5 times that of the benchmark deposit rate, from 1.3 times, in an effort to continue down the interest rate liberalisation path.

AUSTRALIAN DOLLAR

The AUD was mixed in May, recording falls against the US dollar (USD), sterling and euro. The Australian dollar fell 3.3% to US$0.7644 in May, assisted by the RBA rate cut, weaker economic data and renewed strength in the USD. The falls came after gains recorded in April.

COMMODITIES

Commodity prices were mixed in May, with recovery in oil, gold and iron ore and weakness in metal prices.

The iron ore price and oil price also rose in May. Metal prices were weaker after good gains in April. Aluminium, nickel, lead, copper and zinc all fell. The gold price rose just 0.5% in May to US$1190.55 an ounce. The gold price has been relatively stable since mid-January.

AUSTRALIAN SHARES

Australian shares were little changed in May, with the S&P/ASX 200 Accumulation Index adding just 0.4%. With one month of the financial year to go, Australian shares have added 11.6% in FY15.

There was strength in several areas of the market in May. Stocks in the Industrials, Health Care and Materials sectors, for example, tended to perform well. Weakness in the heavyweight Financials sector prevented the Index from making further progress.

Three of the ‘big four’ banks reported semi-annual earnings early in the month. The actual results were overshadowed by ongoing concerns over capital requirements in the sector. Regulator APRA is rumoured to be considering an increase in minimum capital levels, which has focused investor attention on balance sheets in the sector. In anticipation of such a move, National Australia Bank completed a A$5.5bn equity raising during the month, some of the proceeds of which will be used to shore up the company’s capital position.

LISTED PROPERTY

The S&P/ASX 200 Property Accumulation Index returned 2.9% in May, 2.4% ahead of the broader Australian share market. The interest rate cut by the RBA on May 5th proved supportive of this income-generative sector.

Listed property markets offshore declined in May. Overall, the UBS Global Property Investors Index fell by 1.3% in US dollar terms. The UK was the strongest-performing region. Continental Europe lagged, returning -6.6%.

GLOBAL SHARES

Global sharemarkets were mixed in May, with the US market moving higher, falls in some European markets and mixed markets in Asia. Protracted negotiations on the next phase of the Greek bailout unsettled markets as did timing of the first rate hike in the US. Liquidity through central bank purchases continues to assist equity markets in moving higher, despite stretched valuations, particularly in the US.

Overall the MSCI World Index rose 0.1% in USD terms and 3.2% in AUD terms given the fall in the AUD over the month.

US markets moved higher with some evidence of a recovery in US data in early Q2 2015, and a slowdown in USD appreciation.

The S&P 500 Index rose 1.0% in the month, the Dow Jones was up 1.0% and the NASDAQ rose 2.6%. Equity markets in Europe were mixed, the German DAX fell 0.4% in May, France fell 0.8% and Spain was down 1.5%. In contrast Italy rose 2.0% and the Athens Stock Exchange rose 1.2% despite no resolution on Greek funding. Equity markets appear sanguine about the risks of the Greek default and exit from the Eurozone. Instead currency markets and bond markets were more volatile. The euro fell 2% against the US dollar in May.

The UK FTSE 100 was up 0.3%, with the re-election of the Conservative government. There are some expectations that this could lead to more aggressive fiscal consolidation, although this would be offset by less monetary policy tightening by the Bank of England.

GLOBAL EMERGING MARKETS

Emerging market (EM) equities fell sharply in May, down 4.2% in USD (MSCI EM Index) after strong gains in April. The MSCI Emerging Markets Index underperformed the broader developed market index. In AUD terms, the index fell 0.9%. The index was not helped by the stronger US dollar in May, which rose 2.4% over the month. All regions suffered losses, with MSCI Latin America reversing gains in April, falling 7.0% in May, with sharp falls in Argentina and Brazil, while Mexico gained ground. Brazil raised rates again in late April, with the SELIC rate now 13.25%, the highest since 2008.

Source: Colonial First State. This information is current at 9th June 2015 but is subject to change.