Real GDP increased by 0.6% in the September quarter to be 2.8% above year ago levels. Household consumption spending increased by only 0.1% in the quarter. However, the surge in private non-dwelling construction which increased 18.4% in the quarter provided a welcome source of growth in the absence of consumption spending and dwelling construction. With respect to consumption, more recent data may be suggesting the worst is behind us. The Westpac/Melbourne Institute consumer sentiment index increased by 3.6% to 103.3 – the highest level in four years. The improvement was likely prompted by the belief that Australian interest rates would stay low and comments by the Prime Minister on the possibility of tax cuts. Whether improved confidence can be sustained in the absence of wage rises remains to be seen. Employment increased by 61,100 people in November with 41,900 new full-time positions filled. However, the unemployment rate remains stuck at 4.5%.
As expected, the Federal Open Market Committee (FOMC) increased the fed funds target rate by 25 bps to 1.25%-1.50%. Two members opposed the change, although the incoming Chair, Jerome Powell, voted in favour of tightening monetary policy. The FOMC cited continued improvement in labour markets and robust economic activity as the catalyst for the change. This was borne out by incoming data with non-farm payrolls increasing by 228,000 in November, building on October’s 244,000 rise. The ISM manufacturing survey also rebounded to 59.7 in December after dipping slightly to 58.2 in November. The FOMC also noted inflation remains subdued with actual core inflation data showing a 1.7% rise over the past 12 months. Nevertheless, FOMC members are forecasting three increases in the fed funds rate in 2018 if current trends continue.
Initial estimates of third quarter GDP showed the European economy growing by 0.6% following 0.7% growth in the previous quarter. Consistent growth at this rate has seen real GDP increase by 2.6% in the four quarters to the September quarter. More importantly, recent surveys show business maintaining a high level of confidence despite continuing political uncertainty. The Markit manufacturing PMI increased to 60.6 in December from 60.1 a month earlier while the equivalent services measure increased to 56.5 from 56.2. While the economy is growing at a decent pace, inflation at 1.5% remains below the European Central Bank’s (ECB) target of 2.0% and is likely to forestall any interest rate increases in the immediate future.
The official NBS manufacturing survey which is skewed to larger, state-owned businesses declined slightly to 51.6 in December from 51.8 a month earlier. In contrast, the Caixin Purchasing Managers Index (PMI) which surveys private companies increased to 51.5 from 50.8. Despite the differences in these results, there is little in these figures to suggest any significant shift in growth trends. Chinese consumer prices were unchanged in November leading to prices being 1.7% above year ago levels.
The final reading for the September quarter showed a 0.6% increase in real GDP compared to the previous estimate of 0.3%. This takes Japanese growth to 2.5% over the past four quarters. Further good news came in the form of the Bank of Japan’s Tankan survey of large manufacturing companies showing an increase to 25 in the final quarter of the year, a level not seen for more than a decade.
The S&P ASX200 Accumulation Index increased by 1.8% in December following the 1.6% return in November. For 2017, the Australian share market returned 11.8%, comprising a dividend yield of 4.7% and capital appreciation of 7.1%. The Resources sector continued to barrel ahead, returning 7.2% in December and a hefty 25.9% for the year. The Industrials sector was robust but looks lacklustre compared to the Resources sector, returning 0.6% in December and 9.0% for the year. A similar pattern was seen in the small cap component of the market with resources stocks boosting returns. Overall, small caps returned 3.2% in the month and 20.0% for the year.
The best performing sectors in December were Energy (+6.4%), Materials (+6.2%) and Telecommunications (+5.5%), finally reversing its recent run of poor results. Worst performing sectors in the month were Utilities (-4.5% and Industrial (-1.2%). For the year, Consumer Staples, Healthcare, Information Technology and Materials all posted returns above 20%. However, the overall market was held back by the poor performance of Telecommunications (-21.3%) and the lacklustre performance of Financials (+5.0%).
The MSCI World ex Australia index returned 1.1% in December following November’s 1.6% increase. Over the past 12 months, developed market global equities have returned 19.4% before taking into effect the impact of currency. Emerging markets posted a strong 2.6% in December and returned 31.0% in 2017. This strength largely reflected share market performance in Brazil (+26.8%) and India (+30%) while Russia returned a scant 1% for the year.
The S&P500 increased by 1.1% in December, with positive momentum continuing despite the US Federal Reserve increasing the fed funds rate at its December meeting. The US market returned a stellar 21.8% in 2017. European markets again faltered in December, falling 1.0% after November’s 2% decline. All major markets posted negative returns with Italy (-2.3%) hardest hit due to renewed election speculation and. Germany (-0.8%) and France (-1.1%) also suffering declines. The weak end to the year meant that 2017 returns were pared back but still managed a robust 13.4% return.
Asian markets continued their recent trend of mixed results with the Shanghai Composite down 0.3% in December while Hong Kong’s Hang Seng (+2.5%) again posted a robust result. However, Singapore’s Straits Times Index (-0.9%) was unable to match Hong Kong’s positive tone. Japan’s Nikkei Index increased 0.2% in the month and 19.1% in 2017 due largely to a surge late in the year following the re-election of the Abe government.
A more balanced view of the likelihood of monetary policy changes saw Australian bond yields retrace some of the fall seen in November. Australian 10-year government bond yields increased to 2.63% at the end of December from 2.5% a month earlier. As a result, the Bloomberg Composite Bond Index returned -0.5% in December. US yields were largely unchanged with few surprised by the Fed’s decision to increase official interest rates. Barclay’s Global Aggregate hedged in $A returned 0.2% in the month. Both Australian and global fixed interest markets returned 3.7% in 2017.
The S&P/ASX200 AREITs index returned 0.2% in December and 5.7% in 2017. AREITs have been buffeted by changing market conditions as investors assess the impact of Amazon’s entry into Australia and lacklustre retail spending.
Global REITs continued recent strong performance, posting a 1.2% return following November’s 2.3% rise. Over the past 12 months, global REITs (hedged) have returned 9.5%, outperforming their Australian counterparts.
The Australian dollar rose sharply in December to end the year at US$0.7804. The dollar’s recent rollercoaster has been largely due to commodity price volatility. Most major metals increased in price in December with Nickel (+15.0%), Copper (+7.0%) and Zinc (+5.0%) posting increases. Iron ore prices increased a further 8% to US$74 per tonne – a likely driver of the stronger $A. Oil prices also increased again with Brent Crude ending the year at US$66.6 per barrel.
Download the December Commentary PDF here.
Fortress Financial Solutions founder Chris Black is an award-winning financial planner based in Toowoomba who specialises in superannuation, investing, business succession, cash flow management, retirement planning and personal insurances (including life insurance, income protection, total permanent disability and trauma insurance).
Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557.
This market update was compiled by BTFG Research.
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