The Commonwealth Budget released in early May was dominated by proposals to lower income tax rates over the next decade, while reiterating the corporate tax cuts that were withdrawn in the face of a likely Senate defeat. Better than expected revenue is expected to see the budget return to balance in 2019-20. Last month’s consumer price data showing inflation running at 1.9% was complemented by wages data this month which continues to show subdued wages growth. Both private and public-sector wages increased by 0.5% in the March quarter, with total wages increasing by 2.1% over the past year. In the Budget, Treasury forecast wages growth of 2.75% for 2018-19, increasing to 3.25% in the following year, but at this stage there are few signs that wages will break out of the 2%-2.5% range. Labour force data showed a small increase in the unemployment to 5.6% rate in April, despite a 22,600 increase in employed persons. Full-time employment increased by 32,700, while part-time employment fell by 10,000.
The US unemployment rate continued its slow grind lower printing at 3.8% in May compared to 3.9% a month earlier. Non-farm payrolls increased by 223,000 compared to market expectations of 189,000. Average hourly earnings for private non-farm employees increased by 0.3% in May to be 2.7% above year ago levels. As the US Federal Reserve (the Fed) slowly ratchets up interest rates, wages growth is being closely watched as signal of building inflationary pressures. However, the Fed’s preferred inflation measure, the Core Personal Consumption Expenditure Price Index, remains relatively subdued increasing by 0.2% in April to be 1.8% above year ago levels. Consumer sentiment remains robust with the University of Michigan survey off recent highs at 98, but still at elevated levels compared to the long-term average.
Initial estimates of May inflation suggest consumer prices have spiked to an annual rate of 1.9% from the sub-1.5% that has persisted for much of the past 12 months. However, a large part of this increase is due to higher oil prices, with the core inflation measure expected to only show a 1.1% rise over the past year. Household and business confidence appears to have stabilised following recent sharp falls, but increased oil prices have the capacity to again dent confidence.
Chinese retail sales increased by 9.4% in April from a year earlier compared to a 10.1% rise in the previous month. The slowing in growth is not of immediate concern given that a similar pattern was seen late last year before sales returned to the 10% level. Also released were house prices showing a 4.7% rise in the price of newly built houses in April compared to a year earlier. However, results vary significantly across cities with prices falling in Beijing and Shanghai. More generally, consumer prices fell by 0.2% in April to be 1.8% above year ago levels. Apart from a spike in February, inflation has been largely below 2% for the past 12 months. GDP increased by 1.4% in the March quarter, keeping the year-on-year growth rate at 6.8%.
At its April meeting, the Bank of Japan left official interest rates unchanged at -0.1% and increased its GDP growth forecast to 1.6% for the 2018 fiscal year. However, actual Japanese GDP contracted by 0.2% in the March quarter following 0.1% growth in the previous quarter. Real GDP has increased by 1.0% over the past year. While the BOJ’s forecast is achievable, the recent growth momentum suggests it will be more difficult than previously expected.
The S&P ASX200 Accumulation Index ended the month increasing by 1.1%. The start of the month showed promising signs of recovery for the financial sector after posting its largest single day gain since the Royal Commission was announced last November. Australian shares in general also began the month well due to a combination of factors including decreasing trade war concerns, a lower $A and positive earnings results from Australian companies. However, geopolitical issues later in the month such as renewed trade concerns and political issues in Italy weighed down the performance of Australian shares.
The best performing sectors in May were Health Care (+5.6%), Consumer Discretionary (+5.1%) and A-REITs (+3.1%). Worst performing sectors in the month were Telecommunications (-10.2%), Financials (-0.2%) and Consumer Staples (-0.4%). Lacklustre performance from Commonwealth Bank (-3.5%) and National Australia Bank (-4.0%) placed Financials as one of the worst performing sectors for the third straight month. Strong performers in the ASX100 included Challenger Limited (+19.4%), Domino’s Pizza Enterprises (+16.7%) and Investa Office Fund (+15.0%). The worst performing stocks were the A2 Milk Company (-12.2%), Treasury Wine Estate (-13.1%) and Link Admin Holdings Ltd (-17.3%).
The MSCI World Index posted a 1.0% return in May. News the US was willing to extend their allies’ exemptions for steel and aluminium tariffs until June 1 eased investor concerns at the start of the month. China’s Vice Premier Liu had negotiations with the US promising to toughen its laws on intellectual property, purchase more US goods and services as well as reduce China’s trade surplus with the US. The overall result from May is that efforts have been made from both sides to avoid an all-out trade war. However, negotiations are continuing and the level of uncertainty remains high.
The Italy MIB30 (-9.2%) was heavily affected this month due to the possible formation of a government consisting of the Five Star Movement and the Northern League. Their anti-EU stance and populist economic policies has dented sentiment.
Other European markets such as France’s CAC40 Index (-2.2%) and the German DAX Index (-0.1%) both finished the month with relatively smaller negative returns. Asian markets including the Singapore Straits Times Index (-5.1%), the HK Hang Seng Index (-1.1%) and the Shanghai Composite (+0.4%) had mostly negative returns.
The Barclay’s Global Aggregate hedged in $A (+0.3%) had a positive return in May following the previous month’s -0.4% return. The Bloomberg Composite Bond Index also returned 0.7%. Australian 10-year and 3-year government bond yields as well as US 10-year and 2-year government bond yields all decreased. The 10-year Treasury yield displayed volatility due to geopolitical risks in trade wars and political concerns in Italy pulling them down while positive economic data pushed rates higher.
The S&P/ASX 200 AREITs index posted a positive return of 3.1% in May. CoreLogic data shows national dwelling values continued to fall in May with the median value falling by 0.1% due to weakening housing conditions in capital cities (-0.2%). This figure has been slightly offset by the continued growth in regional areas (+0.2%). Poor performance from the Melbourne housing market in May (-0.5%) means it has surpassed Sydney (-0.2%) as the weakest housing market over the past three months.
The Australian dollar ended the month at US$0.7568 compared to US$0.7530 in April. Iron ore prices have fallen 3.0% to US$65. Brent Oil has continued to make gains increasing to US$77 a barrel this month mainly due to the US withdrawal from the Iran nuclear deal. Decreasing inventory levels as well as high global demand have also contributed to this rise in oil prices which have been reflected in Australian petrol prices throughout this year. Nickel had a standout performance in May (+11.5%) while zinc (-0.9%) and gold (-1.0%) posted relatively small negative returns.
Key market returns at 31 May 2018
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