Monthly Commentary – JULY 2018

Developments in the global economy

Economic data reinforced existing monetary policy expectations. Continued robust activity and employment data in the US bolstered the case for continued, albeit measured, fed funds increases while subdued inflation in Australia and Europe underlined that rates are likely to remain on hold in these regions.



Consumer price increases remain relatively subdued with overall prices increasing 0.4% in the June quarter to be 2.1% higher than a year earlier. There were large increases in Health (+1.9%), Alcohol and Tobacco (+1.6%) and Transport (+1.6%) in the quarter, but these were offset by falls in Communications (-1.3%), Food (-0.4%) and Recreation and Culture (-0.4%). Producer prices are similarly subdued increasing by 0.3% in the quarter and 1.5% for the year suggesting there is little price pressure in the pipeline. Labour force data showed a 50,900 increase in employed persons, but the unemployment rate was unchanged at 5.4% in June. Indicators of residential construction including building approvals and housing finance suggest activity in this area will ease off, although approvals bounced back in June following a very weak May result. At this stage, there is little to suggest the Reserve Bank will see the need to tighten monetary policy despite the recent stronger than expected GDP growth figures.


US non-farm payrolls increased by 213,000 in June following a 244,000 rise in the previous month. However, an increase in the participation rate saw the unemployment rate rise to 4.0% from 3.8% in May. Of greater interest with respect to the pace of the Fed’s monetary tightening program was the relatively subdued 0.2% rise in average hourly earnings which translates to a 2.7% rise in earnings over the past 12 months. Core inflation is also continuing its slow grind higher with prices excluding volatile items such as food and energy increasing by 2.3% over the past 12 months. This compares to the 2.1% inflation rate three months ago and 1.7% 12 months ago. Activity data continues to be robust with the advance GDP results for the June quarter showing an annualised 4.1% increase.


Positive sentiment at the start of the year has increasingly given way to a more pessimistic attitude. The ZEW Indicator of Economic Sentiment fell to -18.6 in July, the lowest level since August 2012. The poor reading reflects the fact that more than 30% of analysts believe economic activity will deteriorate over the next six months. Other surveys such as the PMI have also deteriorated since the start of the year but have settled at a level suggesting the European manufacturing will continue to expand, albeit at a slower pace. While inflation is now running around 2%, this partly reflects higher oil prices. Excluding volatile items such as energy and food, inflation is closer to 1%. At its July meeting, the European Central Bank again flagged that official rates would likely remain unchanged into 2019 and that while asset purchases would continue they would start to be wound down after September 2018.


Chinese real GDP increased by 6.7% in the year to June, a touch softer than the recent 6.8% growth rate. While some have pointed to the trade war it is probably too early to see any specific impact on the economy, although it may be influencing investment decisions. Export growth was virtually unchanged in June, growing by 11.3% from a year earlier compared to the 12.6% gain in May. Consumer prices fell 0.1% in June to be 1.9% above year ago levels.


Despite speculation the Bank of Japan would move away from its easy monetary policy rhetoric, the last quarterly Outlook Report was consistent in positioning for an extended period of low interest rates. This likely reflects some easing in growth indicators from earlier in the year, concerns around the impact of consumption tax increases due in 2019 and still low inflation.


Developments in financial markets

A rise in US bond yields was not enough to curb positive investor sentiment which saw most equities markets end the month higher. In contrast to June, global equities performed better than the domestic market. Despite still positive economic momentum, most commodities including oil prices ended the month lower.


Australian shares

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.

International shares

The MSCI World Index rebounded sharply in July posting a 3.2% return following June’s 0.3% decline. An easing of trade tensions and largely positive economic data drove markets higher. The S&P500 Index increased by 3.6% with tech stocks rebounding from the fall seen in late June, although gains were again tempered late in the month.

Asian markets were largely higher following June’s weakness, although Hong Kong’s Hang Seng Index fell a further 1.3% after June’s 5.0% decline. The Shanghai Composite increased 1.0% as investors considered the previous month’s fall overdone. Note, the Shanghai Index has fallen 12.1% over the past 12 months. The Singapore Straits Times Index (+1.6%) and the Nikkei 225 (1.1%) benefitted from improved sentiment and the rebound in tech stocks.

Despite softer economic data and continued political instability, European markets were able to rebound with Italy’s MIB30 Index (+2.7%), France’s CAC40 Index (+3.5%) and the German DAX Index (+4.1%) all posting positive returns.

Fixed Interest and Cash

The Bloomberg Barclay’s Global Aggregate Bond Index hedged in $A was unchanged in July while the Bloomberg AusBond Composite Bond Index returned 0.2%, building on June’s 0.5% increase. Over the past 12 months, Australian fixed interest has returned 3.0%, outperforming their global counterparts that have returned 1.5%. US, UK and European government bond yields were all higher in the month, limiting the return on the global aggregate. In contrast, Australian 10- year bond yields have been largely unchanged over the past 12 months reflecting expectations that inflation pressures remain subdued and that the Reserve Bank of Australia is unlikely to change monetary settings.


The S&P/ASX 200 AREIT Accumulation index increased by 1.0% in July following June’s 2.2% return. Strong performances from Mirvac (+5.1%) and Stockland (+4.5%) were offset by poor returns from Scentre Group (-3.2%) and Charter Hall Long Wale REIT (-3.2%). Global REITs posted a similar return of 0.9% in July. However, performance over the past 12 months has diverged significantly. Australian REITs have returned 14.2% over the past 12 months while global REITs have only managed to return 6.1%. This divergence may partly reflect the fact that US bond yields have risen over this period while Australian yields are barely changed.

Currency and commodities

The Australian dollar ended the month slightly higher at US$0.7429 compared to US$0.7407 in June. Interest rate differentials favouring the US$ have put pressure on the A$, but a 2.2% increase in iron ore prices to US$68.5 in July helped boost the A$. Other commodity prices were mainly lower although Tin managed to buck the trend by increasing 1.7%. Lead (-11.4%) and Zinc (-7.9%) were hardest hit and the gold price continued its recent downtrend falling 2.4%. After again getting close to the US$80 per barrel level, Brent oil prices ended July 6.5% lower at US$74.

Key market returns at 31 July 2018

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