Real Gross Domestic Product (GDP) increased by a seasonally adjusted 0.9% in the June quarter, largely in line with market expectations. Upward revisions to the previous three-quarters due in large part to stronger than the previously reported dwelling and non-dwelling construction means that over the past four quarters the economy has grown by 3.4%. Household private consumption expenditure increased by 0.7% in the quarter to be 3.0% above year-ago levels. While the result is relatively strong, spending has been partly financed by a fall in the household saving ratio to 1.0%. Despite the encouraging GDP result, it is unlikely to prompt a change in the domestic monetary policy trajectory. There is little to suggest that growth is likely to accelerate further and inflation and wage measures remain subdued. Furthermore, given recent mortgage increases by major banks, consumers may naturally become more cautious without the need for higher official interest rates.
US retail sales increased by 0.5% in July to be up 6.4% year-on-year. While relatively strong compared to a year ago, the monthly results have been very volatile with the June figure revised down to show a 0.2% increase. Also prompting a note of caution has been the fall in the University of Michigan’s consumer sentiment index to 96.2 in August from 97.9 in July. This could reflect developing consumer concerns about higher interest rates including the expectation of another rate hike in September. Core inflation increased by 0.2% in July taking the year-on-year change to 2.4%. Little in the economic data suggests a change in the US Federal Reserve’s current strategy of measured but ongoing increases in official interest rates.
European economic data was unremarkable with updated GDP results relatively unchanged from the initial estimates and showing the economy grew by 2.2% over the past year. Growth momentum has eased from the strong pace seen in late 2017 and early 2018, which has seen the European Central Bank (ECB) reiterate its “rates on hold” mantra at recent board meetings. At the same time, headline inflation fell by 0.3% in July taking the annual inflation rate of 2.1%. The more important core inflation measure is running closer to 1% providing further evidence for the ECB to hold off on any monetary tightening. In line with other recent anaemic data, European retail sales fell 0.2% in July and are 1.1% above year ago levels.
A number of economic indicators are suggesting consumers may be easing back on spending, although this is unlikely to see a significant decline in overall growth which is expected to be maintained above 6.5% over the remainder of 2018. Motor vehicle sales were 3.8% below year ago levels in August with passenger vehicles suffering a greater fall, while the sale of commercial vehicles actually increased. Retail sales are showing 8.8% year-on-year growth, but this compares with the 10% pace seen earlier in the year.
The Japanese economy grew by 0.7% in the June quarter following a 0.2% decline in the previous quarter. A sharp rebound in consumption spending was a major contributor to overall growth, but this was not reflected in consumer confidence results which fell slightly in August and have been subdued for the past five months.
The S&P/ASX200 Accumulation Index increased by 1.4% in July following a 3.3% return in June. Over the past 12 months, the market has returned 14.6%. The best performing sectors were Telecommunications (+7.9%), Industrials (+3.5%) and Consumer Discretionary (+2.1%). The bounce in Telstra and therefore the Telecommunications sector follows two months of sharply negative returns and a negative trend that has been in force for the past two years. Sectors generally seen as more defensive such as Utilities (-1.4%) and Consumer Staples (-0.5%) performed poorly while Info Tech (-1.2%) and Materials (-0.1%) also posted negative returns. The best performing stocks in the ASX100 were Cimic Group (+14.3%), TPG Telecom (+11.4%) and Brambles (11.3%) while Evolution Mining (-20.5%), A2 Milk (-8.7%) and Carsales.Com (-7.8%) were the largest detractors.
The MSCI World ex Australia Index returned 1.4% in August following July’s strong 3.2% return. Over the past 12 months, developed international equities have returned around 14%. In contrast, the MSCI Emerging Markets Index has returned only 4.3% over the same period. Asian markets were largely lower with Hong Kong’s Hang Seng Index falling 2.4% in August and the Shanghai Composite down 5.3%. The volatility of the Chinese market can be clearly seen in performance over the past few years with the Shanghai Composite rising by 9.4% in 2015, falling 12.3% in 2016, rising again by 6.6% in 2017 and falling again by 19.5% in 2018 to date. After a strong showing in July, European markets were again hit by a crisis of confidence as a result of ongoing political unrest and ambiguous economic data. Italy’s MIB30 Index (- 8.8%), France’s CAC40 Index (-1.9%) and the German DAX Index (-3.4%) all posted negative returns.
The Bloomberg Barclay’s Global Aggregate Bond Index hedged in $A returned 0.3% in July while the Bloomberg AusBond Composite Bond Index returned 0.8%. The stronger performance of Australian fixed interest partly reflected dwindling expectations of any change in Australian monetary policy and resulted in Australian government bond yields falling to 2.52% from 2.65% a month earlier. This follows continued undershooting in inflation outcomes compared to expectations and soft wages growth. In contrast, while US bonds yields fell slightly to 2.86%, most expect the US Fed to continue tightening monetary policy over the remainder of 2018 and into 2019 which is likely to see yields again move higher.
The S&P/ASX 200 AREIT Accumulation index increased by 2.7% in August following July’s 1.0% return. The result was driven by the strong performance of Goodman Group (+11.1%) and Mirvac (+6.6%) but not all property trusts shared in the positive trend with Scentre Group down 0.7% and Abacus Property Group falling 7.0%. Global REITs lagged their Australian counterparts posting a 1.3% return following July’s 0.9% rise. The results over the past 12 months are more extreme with Australian REITS returning 15.8% while global REITS have returned 7.2%.
The Australian dollar was a casualty of the leadership challenge against Malcolm Turnbull. The A$ ended the month of August at US$0.7192 compared to US$0.7429 a month earlier. A fall in iron ore prices to US$67 and further weakness in other commodities also weighed on the dollar. Sharp falls in the Zinc price in July were matched by an 8.8% fall in August while Lead (-4.3%) and Copper (-5.0%) also suffered declines. Oil bucked the trend of lower prices with Brent oil ending the month 4.9% higher at US$77.7.
Key market returns at 31 August 2018
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