Monthly Commentary – FEBRUARY 2019

Developments in the global economy

Central banks around the world are recalibrating investor expectations of future monetary policy moves. Weak domestic economic data has reinforced the belief that the next move by the Reserve Bank (RBA) may be to cut official interest rates. In the US, the Fed has continued recent guidance that the prospect of further rate hikes through 2019 should be tempered.



The Wage Price Index increased by a seasonally adjusted 0.5% in the December quarter to be 2.3% above year ago levels. The RBA noted it is expecting an improvement in disposable income in its latest testimony the House of Representatives Standing Committee on Economics. However, the latest figures continue the trend of the past five years where quarterly wages growth has largely been limited to 0.5%. Earlier in the month, retail sales figures for December were released showing a seasonally adjusted 0.4% fall in spending. This follows a 0.5% increase in November. Construction related data continues to show the risks in this area with the value of work done falling 2.5% in the December quarter with most of this concentrated in residential and engineering construction. The more forward looking building approvals figures also fell sharply in December.


The Fed Chair Jerome Powell’s recent comment that “cross-currents and conflicting signals” are being observed provides a succinct summary of US economic data. US retail sales fell by 1.2% in December from a month earlier, the worst monthly result in almost 10 years. However, consumer confidence appears to have rebounded with the preliminary reading for the Michigan consumer sentiment survey increasing to 95.5 in February from 91.2 a month earlier. Manufacturing surveys also took on a more positive tone, partly as a result of encouraging signs in the tariff negotiations. Meanwhile, non-farm payrolls increased by 304,000 in January, following a revised 222,000 rise in December. The US government shutdown has had some impact on labour force data with the uptick in the unemployment rate to 4% due to the definition of unemployment including those temporarily laid off.


Early estimates suggest Euro area GDP increased by 0.2% in the December quarter to be 1.2% above year ago levels. This represents a further deceleration in European growth from the 1.6% rate posted in the September quarter and the 2%-plus rate seen earlier in 2018. This is likely to reinforce the European Central Bank’s (ECB) stance that current expansionary monetary settings will be kept in place for some time. Recent business and consumer surveys appear to have stabilised, but confidence in the outlook remains lacking. The Euro area business climate indicator was unchanged at 0.69 in February. By way of comparison, the indicator was above 1.4 a year ago.


The Chinese government continues to talk up the economic outlook following the recent introduction of stimulatory measures including tax cuts for small business, infrastructure spending and a cut in the reserve requirement ratio which means that banks can lend more. Chinese inflation increased by 0.5% in January, but this comes after a run of near-zero results. Over the past 12 months, prices have risen by only 1.7%. Despite signs of weakness in some areas of the economy, house prices are yet to feel the stress. Average house prices rose by 10% in the year to January.


The preliminary reading for the December quarter showed the Japanese economy grew at 0.3% from the previous quarter, following the September quarter’s 0.7% contraction. The September quarter was impacted by a number of natural disasters which affected household spending and business investment. Inflation remains subdued with headline inflation increasing at only 0.2% in the year to January, while core inflation increased by 0.8%.


Developments in financial markets

Positive momentum in equities continued in February as investors gained further confidence that the US/China tariff issues would not deteriorate to a worst case scenario and Chinese growth prospects also improved. Expectations the RBA’s next move may be a rate cut saw Australian bond yields fall and may have provided an extra lift to Australian equities which outperformed their international counterparts by a significant amount.

Australian shares

The S&P/ASX 200 Accumulation Index returned 6.0% in February following a 3.9% in January. The resources sector again outperformed the rest of the market by returning 6.9% compared to the 5.7% return for the industrials. Small caps largely matched the resources stocks by returning 6.8% in the month. The sharemarket has returned 7.1% over the past 12 months, a significant turnaround from the return of -2.8% for the 12 months to December 2018. All sectors except consumer staples posted a positive return with Coles and Woolworths dragging consumer staples lower. The best performing sectors were Financials (+9.8%), Energy (+7.9%) and Information Technology (+7.6%). The worst performing sectors were Consumer Staples (-1.5%), Healthcare (+1.0%) and Property Trusts (+1.8%). At the stock level, the worst performing stocks in the ASX100 were Cochlear (-11.9%), Bank of Queensland (-11.4%) and Coles Group (-9.4%). The best performing stocks again included Magellan Financial Group (+24.7%) which was joined by IOOF (+35.9%) and Cleanaway Waste (+20.2%).

International shares

The MSCI World ex Australia Index (A$) returned 5.6% in February and has returned 10.1% over the past 12 months. Emerging markets were less positive with a 2.7% return but remain in negative territory over the 12 month period.

Over the month, the S&P 500 returned 3.0% with positive momentum maintained but tempered by somewhat weaker economic data. The major European markets of Germany (+3.1%), France (+5.0%) and Italy (+4.7%) all posted positive returns, although Spain and many of the emerging European markets went backwards. The Shanghai Composite posted a massive 13.8% increase in February as investors return to Chinese equities following a period of concern around the growth outlook.

Fixed Interest and Cash

Australian 10-year bond yields fell to 2.1% in February from 2.24% a month earlier as expectations mount that the next move by the RBA may be a rate cut. This saw the Bloomberg AusBond Composite Bond Index post a 0.9% return in the month, boosting the 12 month return to 6.2%. In contrast, US 10-year government bond yields increased to 2.72% with investors reflecting that pessimistic growth views and the “Fed on hold” rhetoric may have been overplayed. As a result, the Bloomberg Barclays Global Aggregate Bond Index hedged in $A returned a meagre 0.1% in February and 3.3% for the year.


As market sentiment improves, some of the flows that had boosted property trust returns in search of a level of safety have ebbed. The S&P/ASX 200 AREIT Accumulation index returned 1.8% in February, lagging the broader market. Similarly global REITs were relatively subdued with the FTSE EPRA Nareit Index (Hedged) returning 0.4% in February following the 10.2% increase in January.

Currency and commodities

The Australian dollar fell 2.5% to US$0.7094 from US$0.7276 a month earlier, largely in response to the view that a domestic rate cut had become more likely. Commodity prices were mainly higher although gold ended the month slightly lower at US$1319.2. Copper posted the strongest return, increasing 6.6% in February while the increases in lead (+3.1%), zinc (+3.1%) and tin (+3.9%) were less extreme. Iron ore prices saw a marginal increase to US$85/mt following back to back months of double-digit increases. West Texas Intermediate (WTI) oil prices increased by 6.0% in February to end the month at US$57.2 per barrel.

Key market returns at 28 February 2019


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