Retail sales were unchanged in September following a 0.5% fall in August. Falls in spending for household goods and eating out were the main detractors. This is consistent with weakness in consumer sentiment in August and September, but it should be noted that sentiment has improved since then.
The Westpac/Melbourne Institute Consumer Sentiment was at 99.7 in November, a slight fall from 101.4 in October. However, both are improvements to the sub-98 readings seen in the previous five months. Continued growth in full-time employment may be boosting consumer confidence with 24,300 full-time workers added in October. However, it should be noted that wages growth remains subdued with the September quarter Wage Price Index again showing wages growth stuck at 2% over the past year. Private capital expenditure for the September quarter continued this year’s run of lacklustre results increasing by only 1% in the quarter to be 2.3% above year ago levels.
US non-farm payrolls increased by 261,000 in October following September’s hurricane impacted 18,000 rise (revised up from an initial estimate of a 33,000 fall). The unemployment rate fell to 4.1% from 4.2% a month earlier. Improvements in the US labour market are beginning to show in wages growth which accelerated to 3.2% in September from 2.8% a month earlier. However, goods inflation remains relatively subdued with core producer prices positing 0.4% rise in October to be 2.8% above year ago levels while core consumer prices increased by only 0.2% and are 1.8% above year ago levels.
Despite subdued inflation, most expect the US Federal Reserve to increase the fed funds rate by 25 basis points to 1.25-1.50% at the December meeting. This would be the third rate hike this year, following on from March and June increases.
The European unemployment rate continues to trend lower falling to 8.9% in September. While significantly above the unemployment rate in the US and Australia, it has fallen from close to 10% a year ago to the current level. Initial estimates of inflation showed a further decline to 1.4% in November – discouraging news for the European Central Bank which would like to see inflation closer to 2%. In the UK, the Bank of England increased official interest rates by 25bps to 0.5% on 2 November. In contrast to Europe, UK inflation has been above 2% through much of 2017, partly in response to the weaker currency following the Brexit vote.
Chinese inflation increased by 0.1% in October following a 0.5% increase a month earlier. Over the past 12 months, consumer prices have increased by 1.9% which is unlikely to be ringing any alarm bells. However, in contrast to consumer prices, producer prices have increased by 6.9% over the past 12 months and have been at this elevated level for most of 2017. This is worrying to the extent that the last time Chinese inflation rose significantly was in 2010 and into 2011 following a significant spike in producer prices.
Japanese consumer sentiment improved further in November to 44.9 compared to 44.5 a month earlier, possibly as a further endorsement of the re-election of Shinzo Abe as Prime Minister. Consumer sentiment is at its highest for four years. The result came after initial GDP figures showing the economy grew 0.3% in the September quarter after posting a 0.6% rise in the June quarter.
The S&P ASX200 Accumulation Index increased by 1.6% in November following the 4.0% return in October. The Resources sector again performed strongly, returning 3.1% in the month but performance was erratic. A strong showing at the start of the month was followed by a sharp retracement with the subsequent rebound petering out as November came to a close. Industrials returned 1.4% in the month.
The best performing sectors in November were A-REITS (+5.3%), Information Technology (+4.5%) and Energy (+4.1%). Both IT and Energy were also strong performers in October. Laggards included Telecoms (-1.6%) which is the only sector showing negative returns in the month, quarter and year. Financials (0.0%) also performed poorly with Commonwealth Bank the only major bank posting a positive return in the month.
Best performing stocks in the top 100 were Santos (+12.9%), Origin Energy (+12.5%) and Northern Star (+11.7%). Worst performing stocks were Orica (-17.2%), ALS (-12.6%) and Graincorp (-8.7%).
The MSCI World ex Australia index returned 1.6% in November following October’s 2.5% increase. Over the past 12 months, developed market global equities have returned 21.3% before taking into effect the impact of currency. Over the month, Emerging markets were not as successful due in large part to weaker Chinese stocks. However, over the past 12 months, they have outperformed developed markets returning 27.9%.
The S&P500 increased by 3.1% in November, as expectations built that US corporate tax cuts are drawing closer. Over the past 12 months, the S&P500 has returned 23.6%. In contrast, European markets faltered in November with the Euro STOXX index falling 2.0%. Germany (-1.6%), France (-2.4%) and Italy (-1.9%) all posted losses in the month. Despite the fall in the month, the Euro STOXX index has returned more than 20% over the past 12 months.
Asian markets were mixed with the Shanghai Composite down 2.2% in November while Hong Kong’s Hang Seng (+3.3%) and Singapore’s Straits Times Index (+1.8%) escaped the negative sentiment. Japan’s Nikkei Index increased 3.2% on continued positive sentiment following the return of the Abe government.
Australian 10 year government bond yields fell to 2.5% at the end of November as domestic rate hike expectations continued to be wound back. Shorter-term yields also moved lower. As a result, the Bloomberg Composite Bond Index returned 0.9% in November and 4.0% over the past 12 months. In contrast, US yields moved slightly higher, particularly the 2 year government bond which increased to 1.78% from 1.60% over the course of the month as the expected December fed funds increase approached.
Lower Australian bond yields and expectations the Reserve Bank will keep official rates on hold for longer than previously expected helped boost the Australian property trusts sector. The S&P/ASX200 AREITs index returned 5.3% in November but has slightly underperformed the broader Australian sharemarket over the past 12 months.
Global REITs were not as strong, but were still able to post a 2.3% return in the month despite slightly higher bond yields. Over the past 12 months, global REITs (hedged) have returned 12.0%, slightly behind the 12.9% returns seen in the Australian property trusts sector.
The Australian dollar continued its recent downtrend, falling to US$0.7565 compared to US$0.7656 at the end of October. Commodity prices were mixed with copper, nickel and zinc ending the month lower, while gold, lead and tin prices moved higher. Iron ore prices jumped more than 8% to US$67.5 per tonne but this had little impact on the Australian dollar. Oil prices also increased with Brent Crude ending the month at US$62.8 per barrel.
Key market returns at 30 November 2017
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Fortress Financial Solutions founder Chris Black is an award-winning financial planner based in Toowoomba who specialises in superannuation, investing, business succession, cash flow management, retirement planning and personal insurances (including life insurance, income protection, total permanent disability and trauma insurance).
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This market update was compiled by BTFG Research.
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