The recent sideways trend in labour force data was reinforced by recent figures, although full-time employment fell by 49,800 persons in January. The unemployment rate fell slightly to 5.5% from 5.6%, due to part-time employment increasing by 65,900 thereby offsetting the drag from full-time employment. The wage price index increased by 0.6% in the December quarter taking the year-on-year change in wages to 2.1%. Subdued wages growth is a factor holding back household consumption with recent comments by the Reserve Bank suggesting this is now front of mind for public policy makers. Consumer sentiment eased back in February with the Westpac/Melbourne Institute index falling to 102.7 from 105.1 in January. Given the sharp falls in equities markets in early February, the decline in sentiment was relatively modest. Interestingly, while consumer confidence remains lacklustre, business confidence increased in January to be at its highest level in almost 10 years, if the temporary spike in April 2017 is excluded. Despite hopes of improved retail spending, sales remain subdued, increasing by 0.1% in January following a 0.5% fall in December.
The equity market falls in early February have led to an increased focus on inflation statistics and the likely US Fed response. US core inflation which excludes food and energy increased by 0.3% in January following a 0.2% increase in the previous month. This keeps year-on-year inflation unchanged at 1.8%. Other measures of inflation are suggesting greater pressures may be at play. For example, the ISM prices paid index increased to 74.2 in February from 72.7 a month earlier. However, it should be noted that the index is only as high as it was in May 2011. Subsequent to this, US inflation was stuck in a range of 1.5-2.3%.
Inflation pressures in the Eurozone remain subdued despite recent improvements in economic activity. The Producer Price Index (PPI) increased by 0.4% in January to be 1.5% above year ago levels. Initial estimates of February consumer inflation suggest it is likely to ease to 1.2% from 1.3% in January. Core inflation (excluding energy, food and tobacco) is expected to be lower at 1.0%. The lack of inflationary pressures is likely to see the European Central Bank (ECB) delay any increases in official interest rates. The EU unemployment rate was unchanged at 8.6% in January from the previous month, and significantly lower than the 9.5% reading from a year earlier.
A semblance of stability has emerged in Chinese economic data. House price increases appear to have settled at around 5%, following the roller coaster ride of the past few years which saw house prices fall by more than 5% in 2015 followed by a 12% increase during 2016. Similarly, the latest inflation reading of 1.5% is within the range of 1.2-1.8% seen over the past 12 months.
While recent partial indicators have been robust, the initial estimate of Q4 GDP disappointed. The Japanese economy increased by 0.1% in the December quarter following a 0.6% rise in the previous quarter. Private consumption was a strong contributor to growth while business spending slowed. Inflation ticked up in January, increasing by 0.4% following December’s 0.2% increase. Over the past 12 months, consumer prices have increased by 1.4%. Food prices increased sharply while clothes and footwear also contributed to inflation in the month.
Despite the volatile month due to the sell off on Wall Street, the S&P ASX200 Accumulation Index ended the month increasing by 0.4% following January’s fall of the same amount. The Australian market managed to rally despite the heavy falls earlier in the month as a result of positive half-year earnings results. Reporting season saw over a third of earnings results beating market expectations which helped investor confidence.
The best performing sectors in February were Healthcare (7.0%), Consumer Staples (2.2%) and Information Technology (1.3%), once again showing similar results to January where the top three performing sectors also included Healthcare and Information Technology. Worst performing sectors in the month were Telecommunications (-6.0%), Energy (-3.7%) and A-REITs (-3.3%).
There were a few companies that contributed to the fast recovery of the Australian share market such as A2 Milk Company (A2M) which performed extremely well posting a 47.5% return for the month. Other strong performers in the ASX100 included Insurance Australia (15.2%) and Lend Lease Group (14.8%). The worst performing stocks were South32 Limited (-13.1%), Domino’s Pizza Enterprises (-16.7%) and Vocus Group Ltd (-18.1%).
Following the release of higher than expected US wages growth in early February, concerns that inflation pressures had finally been unleashed became widespread. This set in train a chain of events including higher bond yields and expectations of a faster and steeper tightening of US monetary policy. This also fed into equities valuations concern that had laid dormant through the previous 12 months. Despite a rebound as the month progressed, international shares performed poorly with most markets posting negative returns.
The MSCI World ex Australia Index fell 3.6% in February largely reversing January’s gains. The Dow Jones experienced its largest daily fall since December 2008 during the financial crisis while major indices such as the S&P500 experiencing their worst weeks since January 2016. European markets took large dives with the German DAX Index falling 5.7% and the Italy MIB30 Index falling 3.8%. Asian markets performed even worse with the Shanghai Composite falling 6.4% and the HK Hang Seng Index falling 6.2%. However, Singapore’s Straits Times Index (-0.5% took a relatively smaller hit compared to other international markets.
US bond yields moved significantly higher in February as inflation fears surfaced. US 10-year government bond yields ended the month at 2.9% from 2.7% a month earlier. Yields in other countries were less impacted leading the Barclay’s Global Aggregate hedged in $A to return -0.2% in February. Australian yields ended the month largely unchanged. As a result, the Bloomberg Composite Bond Index returned 0.3% in February.
The S&P/ASX200 AREITs index returned -3.3% in February, matching January’s decline. Over the past 12 months, AREITs have returned -0.2% with Utilities and Telecommunications the only sectors to have posted worse performance over this period. Global REITs returned -6.4%, with higher bond yields and fears of more to come having a greater impact on property trusts than the broader market.
The Australian dollar reversed in February ending the month at US$0.7762, compared to US$0.8057 a month earlier. Iron ore prices jumped 10.3% to US$80.5 per tonne but other commodity prices were largely softer. Copper fell a further 2.6% while zinc (-3.3%) and gold (-2.0%) reversed some of January’s gains. Brent Crude fell 6.2% to US$64.6 per barrel.
Key market returns at 28 February 2018
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