Economic Update

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

Underlying economic growth is great!

– New pockets of growth keep emerging

– Markets have responded positively

– The Federal Reserve rate rise shows confidence

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

As we drifted into the end of the financial year, the economic fundamentals continued to strengthen. People spoke of coordinated global growth. And any expectations of recessions here, or in major foreign countries, are far off.The Big Picture

But there were a number of ‘noisy’ events to disturb this rosy picture of growth. There was the Singapore summit between Trump and North Korea leader, Kim Jong-Un. Talk of tariffs and trade wars kept hitting the news wires. And, at home, we had income tax cuts passing into legislation but corporate tax cuts stalling.

The ASX 200 followed an unusually independent path in June. Normally, the Wall Street overnight leads are strong indicators for what happens here – but not so in June.

We posted an impressive gain of +3.0% for our index over June while Wall Street struggled to make a gain of only +0.5%. We had a number of sectors performing particularly well – but it was Financials that drove the market. As by far the largest sector, Financials posted an impressive gain of +4.1% in June. The Banking Royal Commission steams ahead but investors seem to be over it.

Over the financial year, the ASX 200 posted a well-above average capital gain of +8.3% which converts into a total return of +13.0% when dividends are reinvested (but not franking credits). Five of the 11 sectors posted total returns of over 25% in the last 12 months.

The US Federal Reserve (the “Fed”) put its benchmark interest rate up by 0.25% points. This was widely expected but the tone of the press conference led analysts to believe that there may now be two more hikes in 2018 rather than the one most had previously expected.

It is good that the Fed is confident enough in the strength of its economy to edge rates up to their “neutral” level. It will take three more hikes before anyone can conclude that the Fed is ready to start tightening to slow down growth. By mid-2019, the US should be back to normal after a decade of negotiating one crisis after another.

There was also good news in a number of countries from which we do not normally expect to be pleasantly surprised. Spain posted economic growth at an impressive 3%. Greece posted its fifth successive quarter of growth and renegotiated its debt deal. Japan surprised markets with a monthly Industrial Production read of +0.4% when ?0.8% had been expected. And, finally, Australia posted +3.1% economic growth for the year when +2.8% was expected!

Some of the enthusiasm on our market should be attributed to the government getting the income tax cuts through parliament. However, corporate tax cuts are another matter.

Cutting corporate tax rates makes Australian companies more competitive in a global economy. Our current rate is particularly high. Lower taxes should make for better growth and employment. It is fifties-esque politicking to say that tax cuts are just for the big end of town. Just look how the US economy responded to its corporate tax cuts.

Our unemployment rate did fall to 5.4% from 5.6% the previous month but these numbers do wobble about and 5.4% is not an historically low number.

The big problem we see for Australia is that the household savings ratio is falling steeply towards zero from around 10%. We are starting to repeat the debt binge of 2000-2007. The fall in the ratio helps growth. When its stalls there is no longer a contribution to growth and employment will suffer.

We are looking forward to another good year but it won’t last much longer unless the government or the RBA acts soon.

Asset Classes

Australian Equities

Our ASX 200 had a solid month posting a total return (i.e. including dividends) of +3.3%. Energy was the best performing sector with +7.8% but Consumer Staples, IT and Utilities all had total returns above +6%. Telcos had another bad month losing ?5.8%. Financials (including the big banks) had a strong month with a total return of +4.1%

The Energy sector also led total returns for the financial year with a gain of 41.6% on a gain in Brent Oil prices of +62.5%. At the other end of the spectrum, Telcos lost ?30.9%. The Utilities sector, at ?0.8%, was the only other to go backwards over the financial year.

We are predicting a below average – but positive – capital gain for the broader index for FY’19. But, with dividends and franking credits, our predicted ‘grossed up’ return is around +9%.

We have the index slightly overpriced to start the new financial year but volatility is well-contained.

Foreign Equities

The world index was down ?0.6% on the month which makes our return look even more impressive.

China’s Shanghai Composite index is now down by more than 20% since its peak earlier in the year.

Over our financial year, our index (+8.3%) just underperformed the world index (+8.5%). The US’s S&P 500 had a capital gain of +12.2% and the Japan Nikkei at 11.3% was not far behind.

Bonds and Interest Rates

The Fed hiked rates in June but it has made it quite clear that it will tolerate slightly above target input data before it considers tightening. This is the sweet spot for growth.

The RBA had rates on hold as all expected. The European Central Bank (ECB) came out more dovish than was expected. The Bank of Japan also was on hold. No one is rushing to stifle growth – partly because wage growth around the world is low.

Other Assets

There have been a number of supply issues with oil production leading to some North American shale oil producers coming back on line.

Over the financial year, oil prices were up about 62.5% while prices for gold and iron ore were flat. Copper prices were up just over 10%.

Regional Analysis

Australia

The monthly read on the labour force was quite good – but not enough to get excited about. At least the slide in the strength of the market over the last few months seems to have been arrested. Economic growth at 3.1% for the year was a pleasant surprise but the chances of staying around that number are not great.

Income tax cuts were introduced but it will take seven years for the full package to work its way through the economy. The corporate tax cuts’ bill has stalled. Unfortunately, the debate has slipped into an “us and them” war. The real issue is global.  If our companies have to pay higher taxes than their overseas competitors, they will take their businesses and jobs overseas – or suffer lower growth at home.

China

China is standing up well to the US over trade and tariffs. It is quite possible that something good will come out of the negotiations even if the style of these interchanges is not what we are used to.

US

The US unemployment rate just came in at 3.8% and there has not been a lower figure since 1974! Trump and his tax cuts seem to be working.

223,000 new jobs were created when only 188,000 were expected – and the previous month’s number was revised upwards by 10,000!

More importantly wages growth came in at 2.7% against an expectation of 2.1%. This is the first real sign that wages are starting to react to jobs data. There really is light at the end of the tunnel.

Europe

Greece has at last got a new debt deal after seven years of austerity. Its PM wore a tie for the first time over this period to celebrate (as he promised he would if a deal got done)! Greece posted five consecutive quarters of positive economic growth and the unemployment rate has fallen from dizzy heights to below 20%.

Spain posted strong growth at 3%. The UK even made some progress in its Brexit debate.

The ECB has been considering tapering for its bond purchase programme. But it came out of its meeting a little more dovish than expected. The ECB is moving gradually and that has helped growth.

The EU is thrashing out new policies on immigration. Compromises are being reached for a more equitable distribution of immigrants.

Rest of the World

It is not clear what will come from the US – North Korea summit on the latter’s nuclear programme. That the summit was even held is extremely positive and both sides seem to have given some wiggle room to the other.

And in a quirk of the soccer World Cup, England supporters cheered on only its second loss ever to Belgium as coming second in its table means it doesn’t play Brazil until the final – should they both make it. For a similar reason in another match, Japan gave up trying in the second half despite being 1-0 down.

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

Smell the roses while we can

– Italian parliament uncertainty caused jitters

– But United States (US) economy keeps on strengthening

– Our Budget could be good for us!

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

Share markets were looking good all month until the last few days of May. Markets are strong because global growth and growth prospects are strong. Then the shenanigans in the Italian parliament caused some wobbles.The Big Picture

Italy is not particularly important in global growth and no one is suggesting Italy is threatening to leave the European Union. But when everything is looking good, a left-of-field event like choosing the leaders in the Italy coalition government suddenly makes everyone wake up. Act first, think later was the maxim!

Anyway, European markets and Wall Street fell by more than one percent on the news – but bounced back the next day. The immediate call was that the US Federal Reserve (the “Fed”) might now not raise rates as expected this year. That impacted bank shares, currencies and movements to safe havens, like US Treasuries over shares.

Anyone who remembers the European crises of the PIIGS countries (Portugal, Italy/Ireland, Greece and Spain) in 2011-2013 must smile at the reaction to this lesser beast. The worst now seems likely to be that fund managers stats for the month just ended might have suffered a tiny bruise.

On the positive side, a survey of USA CEOs reported that 71% thought the US was up for another three years of good growth. And then the OECD predicted two more strong years of global growth. That backs our view and reinforces our strategies for medium term investing (Forget the short-term. That’s for traders)

The Fed was on hold this past month and the question following the announcement, and then the Fed minutes, was how strong the economy is. It could easily take the two more hikes expected at the beginning of the year. But it might even be able to take an extra one because the economy was still strengthening. Hours after the Italian job, some were suggesting there may now only be one more hike this year!

The US is gliding towards its neutral interest rate of about 2.5% (from the current 1.5% – 1.75%) by mid-2019 and it matters not one iota whether that is one or two months sooner or later!

US CPI inflation came in at 2.5% (but not its preferred “PCE” measure) which is above the 2% target. The Fed has assured us that it can handle inflation above 2% for a little while. There is no need for knee-jerk reactions. This is the stuff of a mature central bank that really is in control. The new chairman, Jay Powell, is earning his stripes.

The US 10 year Treasury (bond) rate hit 3.1% for the first time in years making that asset at last a viable alternative to equities. Then the Italian parliament postured! And the 10-year rate fell to 2.84%

On the face of it, our government’s Federal Budget looked good for growth and stability. The real point is, in this divisive era in politics, what changes will pass parliament?

The argument about cutting taxes for big corporates or low income individuals has been misguided. If tax cuts to corporates increases the pie to the extent that the lower income individual’s new slice of the pie is bigger than it would otherwise have been, that is the way to go. Of course, that is a complex question that requires some serious analysis rather than the divisive call for whom is the most deserving of tax cuts.

Trump placed sanctions on Iran and then had an on-again off-again relationship with North Korea over a Singapore Summit on its nuclear programme. Neither side can afford to look weak so bring on more posturing. Come August, or maybe sooner, global economic growth will be the main game in town again and all might look good.

Asset Classes

Australian Equities

Our ASX 200 had a solid month posting a total return (i.e. including reinvested dividends) of +1.1%. Consumer Discretionary and Healthcare stocks posted total returns of over 5%. The only big loser was the Telco sector as it fell about ?10%.

While our broad index is doing quite well, those sectors paying higher dividends have been losing capital value to offset the dividends being paid.

With the financial year drawing to a close, it is worth noting that the total returns for the broad index are up +9.4% while Financials are down ?2.4%, Telcos are down by ?26.7% and Utilities by ?16.4% so far. Obviously, therefore, some sectors are doing particularly well. For example, Materials, Consumer Staples and Healthcare sectors are all up over 20% in the financial year to date.

Foreign Equities

The US S&P 500 and the London FTSE both posted capital gains of 2.2% in May. The world index was almost flat with Japan’s Nikkei and Emerging Markets going backwards.

For much of May, our market did not follow the overnight leads as closely as it often does.

Bonds and Interest Rates

The RBA, Fed and Bank of England were on hold in May. The US 10-year Treasuries’ yield hit a multi-year high before retracing quickly to 2.84%.

The probability of a Fed rate hike in June fell from a near certainty to around 70% on the Italian political news. But, since that murmur has passed, it will probably get back close to a certainty before the June Fed meeting takes place. It is starting to look like we will now get three hikes this year (as they stated in December) rather than the more bullish four many predicted a few weeks ago.

Other Assets

There were no major upheavals in the main commodity prices as they affect Australia. Oil prices have stayed high while the Iran sanctions take hold.

Regional Analysis

Australia

While the rest of the world seems to be going gangbusters, our slightly sluggish growth is not what it could have been with a less divisive parliament. Our unemployment rate kicked up a notch to 5.6% while the US’ rate is down to 3.9% – the lowest this millennium – and the OECD rate is the lowest since 1980.

Our Budget might do something good for the country if it is enacted but much of it probably won’t get through parliament. Everyone else is cutting company taxes while there is big support for not doing so in this country. Are we the only country that knows what is best?

China

Regular readers of this column might recall that we have had an almost unwaveringly positive view about the China economy and its future. Meanwhile there have been a number of periods of intense scepticism from the so-called ‘China bears’.

The hibernation of those bears now means that China economic data releases no longer get as much attention. We keep our ‘eyes on the prize’ and all seems well. This China strength is arguably the reason that the Australian resources gave our more domestically focused stocks a good hiding in the current financial year.

And with the ‘One belt one road’ initiative and stability in the China political hierarchy it might be hard to keep up the enthusiasm for this section of the economic update. It could be become a repetitious ‘all is good’ section!

So the latest Purchasing Managers Index (PMI) for manufacturing smashed expectations at 51.9 (against an expected 51.3) and the services PMI was a blistering 54.9. A simple ‘50’ is a call for growth.

US

There is increasing support that the US economy is strong – if not getting stronger. Retail sales were good and the Fed’s comments were supportive. That US inflation creeping above its target rate is encouraging. The US unemployment rate was down to 3.9% which is the lowest since the year 2000.

The so-called ‘Beige book’ just came out from the Cleveland Fed. It gave an upbeat report across the regions of the USA. It gave a big plus to manufacturing – President Trump’s special child

Europe

If it wasn’t for the latest political machinations in Italian politics – and they seemingly have had this sort of government for decades, if not longer – the focus would be on Brexit and Trump tariffs on German cars.

Neither negotiations are going well but we are firm believers in the notion that it is in everyone’s interest to get a good outcome without losing face. Perhaps without TV there would be less posturing.

Germany did report some very good wages growth above price inflation but the UK’s Q1 economic growth was low – but possibly because of the really bad weather that was called “the beast from the east”. Bank of England Governor, Mark Carney, played that card.

Europe is on track but journalists will always find something to beef about!

Rest of the World

The news from Malaysia that the new Prime Minister just sworn in is 92 years of age caused some surprise.

Importantly, North Korea seems to be coming to the table on nuclear disarmament talks with the US. Of course, Kim Jong Un can’t afford to come quietly. And nor can Trump. It is entirely possible that Trump will have pulled off the negotiation of the decade – if not the millennium – with his “my button is bigger than yours” face-off.

Argentina’ central bank hiked its reference interest rate to 40% (there is no missed decimal point between the “4” and the “0”!) and Turkey hiked its rate from 13.5% to 16.5% in one go. Both are trying to protect their currencies. Any economic problems we have are mild by comparison.

The best news is that the OECD called another two years of strong world growth – at around ‘cruising speed’ of 4% p.a. and the OECD unemployment rate is at the lowest since 1980.

Of course, one day another global recession will arrive but, in the meantime, why not just smell the roses.

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

– Australian share market recovers
– United State (US) economy seen as strengthening
– Royal Commission casualties
– Korean peninsula frictions easing

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

After two challenging months for equity markets, April turned out an impressive +3.9% for the ASX 200 but only +0.3% for the S&P 500 on Wall Street. Even better for Australia – that big gain was made up of four consecutive weeks of all positive gains. Low volatility returned.

The dominant negative influence on Wall Street was the ‘tech rout’. A number of mega tech companies like Apple suffered significant price corrections. That we do not have such a tech sector in Australia explains in part how we avoided much of the US volatility.

The US produced an impressive company reporting season with about 80% of companies beating analysts’ expectations with their Q1 earnings reports.

The US Federal Reserve (‘Fed’) produced minutes of its last meeting with a strong assessment of the US economy. It led the Fed to hold the line on there being three rate hikes in 2018 but possibly increasing the pace in the following two years.

The US reported slightly weaker economic growth for quarter one but a big beat on Retail Sales for the month. US jobs did come in well under expectations for the month but that followed an exceptionally strong report the previous month. The average of two months’ data was about on expectations.

China posted above-expectations, with economic growth at 6.8%. The April Purchasing Managers’ Index (PMI) for manufacturing came in at a solid 51.4. Talk of trade wars between the US and China appears to be taking on a more conciliatory tone.

At home, the Royal Commission into the Financial Services Industry produced some casualties. AMP’s chairman resigned as a result of certain findings. A high-profile financial planner (and principal) is reported to have lost all of his regular spots on TV and in the press for allegedly ‘bad’ advice. A UBS analyst put a ‘Sell’ recommendation on Westpac after assessment of evidence on its home loan book. Westpac’s stock price took an immediate tumble.

The Reserve Bank of Australia (RBA) kept rates on hold in April and again at the May meeting. With inflation coming in at 0.4% for the quarter and 1.9% for the year, this economic indicator is still below the RBA’s target range of 2% to 3%.

Our jobs report continues to see underlying growth in full-time jobs slipping month-by-month but it is still positive. The unemployment rate is stuck at around 5.5% which is well above most people’s estimates for full employment.

Japan emphasised the need to keep monetary policy loose until inflation gets above two per cent. The European Central Bank also reaffirmed that it will not start hiking rates anytime soon. UK economic growth, coming in at only 0.1% for the quarter, means that hikes anytime soon are unlikely. Policy makers around the world seem to be coordinated and in tune with keeping global growth on track for a strong 2018 and 2019.

While President Trump continues to be unpopular in the media and elsewhere, he scored two big wins in April. A joint US-UK-France missile mission attacked terrorist cells in Syria further reducing the likelihood of global unrest from terrorists. In addition, the North Korean president Kim Jong Un walked across the border to South Korea to meet his opposite number. Trump is also reportedly planning a meeting with Kim Jong Un. North and South now have a ‘hotline’ for immediate contact. This sentiment is a far cry from the fear of nuclear attacks from North Korea a few months or more ago. Trump stressing that he had a ‘bigger button’ seems to have worked even if reporters scoffed at the time!

Apart from the controlled unwinding of an overbought tech sector in the US, the world economy and markets seem back on track for stable growth prospects.

Asset Classes

Australian Equities

Our ASX 200 gained in April what largely it had lost in March. Resource stocks and the Healthcare sector were particularly strong performers. A more stable outlook for China and commodity prices helped resources.

Market volatility is back down to below long-term average levels and our index is once again ABOVE the 6,000 level. The total returns for the index – that is including reinvested dividends but not franking credits – for the financial year to date is a reasonable, but not stellar, 8.3%. But, with franking credits, that return rises to about 9.5%.

Foreign Equities

Major indexes such as Japan’s Nikkei, the London FTSE and the German DAX all had an even stronger April than Australia but the Wall Street S&P 500 index only produced a modest return of 0.3%.

Apple’s sales of iPhones are reportedly seen as underperforming; Amazon is being berated by Trump over his perception of its abuse of the US postal service; and Intel’s chip-making business is seen as losing demand as Apple plans to take manufacture of chips in-house by 2020. All-in-all the tech sector had a bad April.

Bonds and Interest Rates

The RBA did not change rates at the April nor May meetings. It is doubtful that they will raise rates in 2018 and they might even cut.

There are reports from the US Fed that rates might start to go up quicker than was thought at the beginning of the year. This is a sign of strength and markets took the statements within its stride. Ten year bonds broke through three per cent for the first time in a few years.

Japan’s chief central banker, Yutaka Harada, emphasised that monetary stimulus will continue until inflation exceeds two percent. The ECB also indicated that rate hikes are not front-of-mind.

Other Assets

The prices of oil, iron ore and copper all posted a strong April. Gold was flat. Our dollar was down a fraction.

Regional Analysis

Australia

While 4,900 new jobs were reported to have been created in April, 19,859 full-time jobs were lost. Part-time growth rescued the day. But, in trend terms, there was a small increase of 1,150 full-time jobs. The unemployment rate was flat at 5.5%.

Inflation came in at 0.4% for the quarter and 1.9% for the year – below the RBA target band. Retail sales grew by only 0.1% for the month.

The Budget will be handed down in May. With economic growth less than desired, we hope for some additional fiscal stimulus.

China

The dialogue between the US and China softened over April and the US announced various exceptions to its steel and aluminium tariffs.

China’s economic growth came in at 6.8% which was just above the expectations of 6.7%. China’s manufacturing PMI was 51.4 – just down from 51.5 in the previous month – but still above expectations.

US

After a major increase in jobs reported in March, the release in April was much lower. But the average jobs gain over the two months was above 200,000 per month. The unemployment rate stayed steady at 4.1%.

US economic growth came in at 2.3% which is down from 2.9% at the end of 2017. However, growth will be revised again (as always) in May and June. Because of weather conditions, this provisional read often gets revised upwards for the first quarter.

With retail sales at a very strong growth of 0.6% for the month, the consumer is back.

Europe

United Kingdom (UK) growth was barely positive at 0.1% for the first quarter which was much less than the expected 0.3%.
Greece is trying to renegotiate its debt repayments with the IMF and the EU. The idea is to tie repayments to economic growth but the two bodies cannot agree on their predictions!

Rest of the World

There is now a ‘hotline’ between North and South Korea. The two presidents shook hands on both sides of the border in an historic meeting. Trump is now saying he gets on well with Kim Jong Un and Trump plans to meet with him soon to discuss restrictions on nuclear capabilities. This is a big plus for world peace.

The US combined forces with France and the UK to launch a targeted missile attack on parts of Syria. It appears that ISIS is becoming much less of a global threat.

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

Geopolitical Stability emerges

– National leaders re-elected

– Russia-OPEC deal

– Economic data strong

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

March was not a good month for global equity markets but there were many signs of an emerging global stability.The Big Picture

Russia’s Putin and Germany’s Merkel each got elected to a fourth term in office. China’s Xi also was re-elected after China allowed for more than two terms at the helm. Having stability at the top is more likely to lead to more of the same – and that’s good for expected global growth.

The US Federal Reserve increased its benchmark interest rate by 0.25% but did not change its expectations of three hikes this year, to the four expected by a big chunk of the market.

The Bank of England flagged a rate increase in May but the Reserve Bank of Australia (RBA) continues to remain on hold. The European Central Bank (ECB) removed its ‘easing bias’ from its communications. Again – more of what was expected.

Towards the end of March, Russia and OPEC announced negotiations for a new deal on controlling supply and, hence, price. They are moving toward replacing the current annual plan to one of lasting a decade or more. Of course the member states would have to adhere to the plan but these signs are also encouraging.

The fly in the ointment for March was Trump’s trade tariffs with possible repercussions in the form of a trade war. Trump started loud and strong but, as March progressed, he softened his stance with a view to negotiating a reasonable solution.

While the various incarnations of the tariff policy were bandied around, markets took sizeable hits. Wall Street had a few days of around 2% changes.

The net result was that the World share index was down ?2.5% for March and ?1.8% for the year-to-date. Our ASX 200 index was down ?4.3% in March but we did not benefit from the strong rally in the US after our market closed.

Facebook suffered major losses for unrelated reasons. It transpires that there have been major breaches of security for personal information. Since Facebook’s market capitalisation is so large, the broader indexes were materially affected by these share-price drops.

On the economic front, US inflation came in bang on expectations and just under the target rate. The wobbles caused by a stronger wage inflation number earlier in the year have dissipated. US GDP growth was revised upwards for the fourth quarter of 2017. The initial read released in January was 2.5% but March’s revision was up to 2.9% when only 2.7% was expected.

China’s Purchasing Manager Index (PMI) readings bounced back after the pollution-reduction measures ended for the year.

At home our retail sales figures disappointed at 0.1% for the month but these data are quite volatile. GDP growth came in at 2.4% for the year against an expectation of 2.5%.

The jobs data were quite strong with over 60,000 new full-time jobs reported. Unfortunately, there was a sharp fall in part-time jobs leaving a more modest number of total new jobs created.

The unemployment rate did kick up one notch to 5.6% but the trend unemployment rate remained static at 5.5%.

We interpret all of this new information reported over March as supporting equity markets having a strong year over 2018. We see the wobbles of February and March as being controlled variations as are normal in equity markets and not the start of something sinister.

In spite of the events largely occurring in the US, the VIX ‘fear’ index was quite well-behaved and is now back to a level that is only a little over the average.

Asset Classes

Australian Equities

Our ASX 200 lost ?4.3% over March but Financials and Telcos each lost more than ?6%. Materials, including the likes of BHP, lost ?5.6%. No sector produced a positive return but Property was flat for the month.

We believe that the market is quite cheap at this point (about 4% under-priced) and trend expectations for gains are quite strong (about 7% pa). As in many cases, February-March was a period for holding tight rather one of than trying to trade the market.

The forecast yield for the index is around 4.8% plus franking credits. Shorten’s call for clawing back some franking credits may have contributed to the exit from the traditional homes of fully franked dividends: Financials and Telcos.

Foreign Equities

The S&P 500 index had a very strong final day for the month so it only finished down by ?2.7%. The major markets performed similarly. Markets – including emerging markets – behaved in this fashion, suggests that this was a broad-based sell-off. There have been no strong indications of which industries would be most affected if, indeed, a trade was to build momentum.

Bonds and Interest Rates

The RBA did not change rates at the March meeting. It is doubtful that they will raise rates in 2018 and they might even cut.

The US Fed raised rates by 0.25% at its March meeting. They did not take the opportunity to increase the number of forecast hikes for 2018 but an extra one has now been pencilled in for 2019/2020. The new chair, Jay Powell, comes across as being a strong leader, who is prepared to speak more openly than past chairs. Powell seems confident that the US economic growth will stay at these levels or even improve in coming quarters.

At last the ECB has removed its ‘easing bias’ comment from its statements. It is still a long way from tightening monetary policy. Thankfully, it is also a long way away from the financial crises that faced the European Union shortly after the GFC.

Other Assets

After a strong February, the price of iron ore had a major correction of ?20% in March. The price of oil gained strongly in March with Brent oil (the international benchmark) touching $70 / barrel. Our dollar slipped to $US 0.7665. It was nearly 81 cents earlier in 2018.

Regional Analysis

Australia

In a trend sense, about 19,000 new jobs were created in February (and reported in March). The more volatile seasonally adjusted number was just a fraction lower but the full-time / part-time changes were stark.

There were approximately 65,000 new full-time jobs in February but a loss of ?46,000 part-time jobs. Closer examination reveals that this imbalance over new jobs by hours worked is simply a reversal of the previous month’s job creation pattern. In short, jobs are being created in a trend sense but not enough to bring down the unemployment rate from a trend level of 5.5%.

Economic growth for the final quarter of 2017 missed expectations at 0.4% which translated into 2.4% for the year. Growth is travelling at just short of trend.

China

Unsurprisingly, President Xi was elected to another term in office now that restrictions on re-election have been removed. There is a new governor for the People’s Bank of China (PBOC) in Yi Gang.

China is at last flexing its muscles over North Korea’s nuclear programme. It has used trade sanctions to bring North Korea to the negotiating table.

China’s manufacturing PMI bounced back to 51.5 from February’s 50.3 reading; the services PMI climbed to 54.6 from 54.0 and the combined manufacturing/services PMI came in at 54.0. Since it is a reading of 50 that separates contraction from growth, these are indeed strong readings. Analysts are interpreting the rises since February are at least in part attributable to the relaxation of pollution-reduction measures taken over the winter months.

US

The US started March with a particularly strong jobs report. 313,000 new jobs were created and the unemployment rate was steady at 4.1%.

Fourth quarter GDP growth was revised up to 2.9% from an initial 2.6% and a revised 2.5% in February.

The US CPI data produced a headline figure of 2.2% and a ‘core’ rate of 1.8%. It is the latter that the Fed focuses on. Its target rate is 2%.

It appears that Trump is entertaining the notion of meeting the North Korean president with a view to curbing its nuclear programme.

Europe

Germany’s Merkel at last formed a successful coalition to start her fourth term in office. On the other hand Italy voted in a populist styled government.

The European economy is healing to the extent that the ECB is no longer favouring an easing bias – but it is still a long way from tightening monetary policy.

Rest of the World

It was reported that South Korea is to reduce the normal working week from 68 hours to 52 hours!

India introduced a 60% tariff on the importation of chick peas which reportedly upset Canadian farmers. The US is not the only country using tariffs to balance trade.

*Ron Bewley (PhD,FASSA) – Director, Woodhall Investment Research

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

Inflation Jitters

– United States (US) jobs data starts a correction

– Market rally hard on no news!

– Australia jobs data are mixed

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

We ended January on a slight sell-off, arguably because markets ran a little bit too hard at the start of the year. But come February 3rd there was one little number in the US jobs report that caused a stir.The Big Picture

Wage inflation came in at 2.9% – not big in itself, but a little higher than expected. That caused market participants to reprice bond yields and equities dived a little more.

A week later, all was forgiven. When the noise was stripped out of the data, markets rallied hard again. But then they sold off in the last couple of days of the month.

The US got a second bite at the inflation cherry with the mid-February CPI read. Both versions of the index beat by a fraction so market volatility started to fluctuate in normal territory.

We had the local ASX 200 minimally overpriced in January, so it was no surprise that our market didn’t fall as far as Wall Street. And it rebounded sharply!

Our labour force data seemed strong on face value. But full-time jobs growth plummeted, while part-time more than took up the slack. Unemployment is stuck in the mid 5% range.

China produced some stunning trade data. The commodity boom is far from over.

China is also moving to ‘do a Putin’ by removing the restrictions on a president serving for an extended period. President Xi looks set to be around for at least another 5 – 10 years. Not bad for now but how will the next generation be introduced? Of course Australia and the UK have no limits on the tenure of a PM.

Stock market volatility certainly spiked in early February but it has already got back to close to the normal zone.

The fly-in-the-ointment for the next month is how the new US Fed Chairman, Jay Powell, handles himself. He faced his first grilling on Capitol Hill at the end of February. Commonsense dictates he will try to help the market slowly adjust to any new scenario he would like to preside over.

He was quite upbeat on the strength of the US economy. He emphasised that this strength has improved since the December Fed meeting.

The market and the Fed were both pricing in three rate hikes for 2018. But that Powell testimony has pushed up the probability of four rates to 34%.

As new data has come to hand – particularly on inflation – volatility may again spike. But it is our view that, at the end of the year, 2018 will be seen as having been good for equity markets.

Our Reserve Bank seems unlikely to do much for months – if not for the whole year and beyond.

It so happens that many high-profile analysts have called the latest US company reporting season (February) as “excellent” and the Australian season that is just ending as “quite good”.

With global growth converging to a stronger world economy, and US and Australian companies predicting a brighter future, 2018 looks likely to be quite a strong year for investors.

Asset Classes

Australian Equities

Our market was almost flat over the month but the Healthcare sector was particularly strong with CSL leading the way. The market finished February at 6,016 – which is well off the February low of 5,821.

We have the index priced fairly with above average capital gains expectations going forward.

Foreign Equities

The S&P 500 index sold off at the end of the month to finish down by ?3.9% which is about the same as for other major indexes. Australia was the standout!

Bonds and Interest Rates

The RBA did not change rates at the February meeting. It is doubtful that they will raise rates in 2018 and they might even cut.

The US Fed and the market seemed in lockstep at the beginning of February expecting three hikes in 2018. But Jay Powell’s first appearance on Capitol Hill was read as being quite bullish on the economy. The odds of four hikes rose to 34% on this testimony.

This change in sentiment nudged the 10 year US Treasury bond rate to almost 3% – the highest in 4 years.

Other Assets

The price of iron ore had a particularly strong month. Oil, gold and copper prices were all down a fraction in February.

Regional Analysis

Australia

16,000 new jobs were created in January – the latest published data point – but full-time jobs fell by ?49,800 and part-time increased by 65,900. The unemployment rate came in at 5.5%.

China

China had another spurt in trade volumes. Imports were up 36.8% and exports were up 10.5%. However the China manufacturing PMI missed expectations at 50.3 from 51.3 the month before. The non-manufacturing PMI was also weaker than expected at 54.4 from 55.3 but it was still very much higher than the value of 50 that divides contraction from expansion. Some experts said that the Lunar New Year celebrations may have adversely affected the data.

The authorities are moving to remove the current limits on the tenure of the President. As a result, President Xi looks set to steer the ship for at least another 5 – 10 years.

On the short-run, an extension for Xi is a positive but the danger is that a lack of new blood in his inner sanctum may make the eventual transition to a new President less smooth.

US

The US started February with a strong jobs report. 200,000 new jobs were created and unemployment was 4.1%. The wage rate grew by 2.9% which caused a change in expectations to a faster rise in interest rates.

Fourth quarter GDP growth was revised down to 2.5% from 2.6%.

Importantly, the wage data contained a significant change to the minimum wage that might only have given a temporary boost to wage inflation.

The US CPI data produced a headline figure of 2.1% and a ‘core’ rate of 1.8%. It is the latter that is favoured by the Fed and its target rate is 2%.

Bloomberg TV reported that Trump has already decided to run for re-election in 2021.

Europe

German inflation slipped in February but not by enough to cause concern.

Brexit negotiations continue to attract attention but again progress is being made but not rapidly enough for many members of parliament across party lines.

Rest of the World

The Winter Olympics concluded in South Korea with apparent harmony between north and south. But the star of the Olympics must be the woman – born and raised in the US – who represented Hungary by virtue of her grandparents. She came last in her event as she did not perform any tricks on her skis that characterise the sport. She qualified by coming in the top 30 in the required number of world cup events. She managed that feat by only entering competitions with less than 30 entrants and coming last in each!

It was reported on Bloomberg TV that the North Korean president, Kim Jong-un, and his father used false Brazilian passports to travel in the 1990’s.