Official Australian Bureau of Statistics data is currently only available up to October and showed that retail sales increased by 0.3% in the month following a 0.1% rise in September. Results were mixed across categories with department store and household goods sales weakest while food retailing and eating out continue to show reasonable growth. Anecdotal evidence suggests that Christmas holiday retail spending was also subdued, in line with recent weak motor vehicle sales. Falling house prices are seen as a major influence on weaker consumption spending. Residential property prices had their third consecutive fall in the September quarter declining 1.5% in the quarter to be 1.9% lower than a year earlier. The largest falls occurred in Melbourne (-2.6%) and Sydney (-1.9%). Labour market data showed that employment increased by a seasonally adjusted 37,000 in November with full-time employment decreasing by 6,400 and part-time increasing by 43,400. The unemployment rate ticked up slightly to 5.1% from 5.0% in October.
The US Federal Reserve increased the fed funds target by 25 basis points to 2.25-2.50% in December as expected. The accompanying statement suggests that there will be only two more increases in 2019 compared to previous guidance of three further hikes. This could reflect Fed concerns about the impact of recent sharemarket falls but could also be in response to the lack of inflationary pressures. Core inflation increased by 0.2% in November to be 2.2% above year earlier levels. Economic data has been mixed with employment and consumer sentiment data remaining relatively strong while the ISM survey showed a significant decline to 54.9 in December from 59.3 a month earlier. Focus on reported data has diminished with attention on the expected impact of the continuing trade war and the government shutdown.
The European Central Bank (ECB) tried to put a positive spin on the economic outlook at its December meeting, but comments about incoming data being weaker than expected and the focus on geopolitical developments, increased protectionism, vulnerabilities in emerging markets and recent sharemarket volatility suggests a higher level of concern. Few expect any change to the ECB’s benchmark refinancing rate which has been held at 0% for nearly three years, particularly given the absence of inflation and the increasingly uncertain growth outlook. Core inflation remains stuck at 1.0% and real GDP growth in the region is unlikely to move above 2.0% over the next few years if the ECB’s forecasts are an accurate guide.
Despite signs of a softening economy and ongoing trade tensions, President Xi Jinping’s speech in December provided little insight into the government’s strategy to alleviate these headwinds. Vehicle sales continue to slow and were 14% below year earlier levels in November while retail sales increased by 8.1% year-on-year in November. While strong on the face of it, this is the weakest growth rate in more than 10 years.
The quarterly Tankan survey of business sentiment appears to have stabilised following three consecutive quarters of declines. Areas of weakness persist in industries such as motor vehicle and machinery production but in most industries sentiment was unchanged or improved. Overall confidence in non-manufacturing large firms improved in the December quarter. Nevertheless, the Bank of Japan left official interest rates unchanged at -0.1% at their December meeting and continue to purchase government bonds and ETFs.
The S&P/ASX 200 Accumulation Index returned -0.1% for December, the fourth consecutive month of negative returns due to rising US interest rates and geopolitical risks. Over the calendar year the market delivered -2.8% with the last four months negating what had been an encouraging start to the year for the market. Despite the poor outcome for 2018 three year returns remain solid at 6.7% p.a. Over the month Resource stocks recovered lost ground having suffered steep falls in previous months. Telecoms (-5.0%), Information Technology (-4.0%) and Financials (-3.1%) were the worst performers over the month, while Materials (+5.3%), Healthcare (+2.9%) and Utilities (+2.9%) were the strongest sectors. Small companies continued to disappoint over the month, down 4.2% with risk aversion still impacting.
The MSCI World ex Australia Index returned -8.0% in December delivering a sharp fall following a positive November. The result may have been worse as the poor international shares return was cushioned by a fall in the AUD against the USD for Australian based investors. While emerging markets dipped -2.5% over the month, this was well off the precipitous fall in developed markets, although developed markets did outperform emerging markets over calendar 2018.
Over the month the S&P 500 fell -9.0% while the Nikkei 225 fell -10.5%. European markets fared a little better but were still negative with the STOXX Europe off -5.7% and FTSE 100 off -3.5%. The Shanghai Composite finished the month down -3.6%.
Increased risk aversion saw bond markets post positive returns in December. The Bloomberg Barclays Global Aggregate Bond Index hedged in $A returned 1.4% in December and 1.7% for the year. The Australian market fared slightly better with the Bloomberg AusBond Composite Bond Index posting a 1.5% return over the month and 4.5% for the year. The search for safety offset the impact of the US Federal Reserve’s interest rate increase with US 10 year government bond yields falling to 2.68% at end December from 2.99% a month earlier. In Australia, yields fell to 2.32% from 2.59%.
The S&P/ASX 200 AREIT Accumulation index returned 1.7% in December again outperforming the broader market as the defensive characteristics of property trusts were valued in the market rout. Over calendar 2018 AREITS have outperformed the broader market, up 2.9% while the broader market fell. Global REITs fell 6.3% over the month, a significant fall though slightly muted versus the broader developed markets fall.
The bounce in the Australian dollar in November proved short-lived with the A$ ending the year at US$0.7054. The renewed fall occurred despite a 10% increase in the iron ore price in the month. Other commodity prices were mixed with copper, zinc and nickel falling while lead and tin moved higher. Gold continues to benefit from market uncertainty, rising a further 5.1% in December to end the year at US$1,279. At the same time, oil prices continue to decline with West Texas Intermediate falling 10.4% in December to US$49.48 per barrel.
Key market returns at 31 December 2018
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