The Consumer Price Index increased by 0.4% in the September quarter to be 1.9% above a year ago levels. This is a slight slowing in inflation from 2.1% in the June quarter. Increases in recreation and culture (+1.6% in the quarter) and alcohol and tobacco (+1.3%) were offset by falls in communications (-1.4%) and furnishings and household equipment (-1.2%). The labour market continues to improve with the unemployment rate at 5.0% in September compared to 5.3% in August, although employment increased by only 5,600 persons. This was partly responsible for a rebound in consumer confidence to 101.5 in October following weakness was driven by domestic political instability. Economic growth appears to have picked up marginally but inflation pressures continue to be absent suggesting the Reserve Bank is unlikely to change monetary settings in the foreseeable future.
Despite the large falls seen in the share market, there was little in the economic releases to suggest an economy on the edge of recession. Advance estimates of Q3 GDP showed the economy expanded at an annualised 3.5% in the September quarter following 4.2% annualised growth in the previous quarter. Most components showed robust growth although there was some weakness in exports and residential investment. Labour markets also showed further improvement with the unemployment rate falling to 3.7% in September from 3.9% a month earlier and non-farm payrolls increased a further 134,000. There are some concerns that this is leading to unsustainable wages growth which will require further monetary tightening to control. Average hourly earnings increase by 2.8% in the year to October and are expected to breach the 3% level soon. Offsetting this, core inflation is currently showing few signs of breaking out of its sub-2.5% range.
Initial estimates show the European economy expanded by 0.4% in the September quarter to be 2.1% above year ago levels. Following a period of improved sentiment at the start of 2018, the ZEW Indicator of Economic Sentiment for the Euro Area has largely collapsed in the second half. It took a further dip in October to -18.4 following a reading of -7.2 a month earlier. The ZEW indicator collates the views of about 350 financial and economic analysts. The European Central Bank (ECB) at its October meeting acknowledged that recent data was weaker than expected but noted that the expansion remained broad-based. ECB monetary policy strategy remains unchanged with the asset purchase programme winding down to completion at the end of December, while official interest rates are expected to remain unchanged well into 2019.
Chinese GDP increased by 6.5% year-on-year in the September quarter. While the Chinese government is targeting growth of 6.5%, the sudden slowing from growth closer to 7% at a time of intense focus on the current trade dispute is likely to mean that measures will be put in place to ensure growth at least stabilises at the current rate. With inflation below the Government’s 3.0% target, there is some scope for an expansionary boost. However, recent data showing an acceleration of inflation to 2.5% in October may limit the scope of any new policies.
The Bank of Japan (BOJ) has noted the impact of intensifying trade tension but believes the economy will continue its moderate expansion. Business surveys were marginally weaker and consumer sentiment largely unchanged in October. The BOJ is expected to maintain its negative short-term interest rate policy given that core inflation has been unable to break above the 1% level.
Developments in financial markets
The S&P/ASX200 Accumulation Index returned -6.1% in October as equities markets worldwide were hit by concerns around higher US interest rates and geopolitical risks. This follows September’s -1.3% return. For the 12 months to October, the Australian sharemarket has returned 2.9% but the three-year return remains a healthy 8.3% p.a. Weakness was broad-based although information technology was hardest hit, falling 11.2%. This was in line with the US market where tech stocks suffered significant falls. Energy (-10.4%) and Consumer Discretionary (-8.0%) also suffered substantial negative returns. Sectors have seen as traditionally being more defensive such as Consumer Staples (-4.7%), Utilities (-4.0%) and A-REITS (-3.1%) also posted negative returns but escaped the worst. While the resources sector was generally lower, a handful of stocks managed to buck the negative trend with Evolution Mining (+12.5%), Newcrest (+6.2%) and Northern Star (+5.8%) the best-performing stocks in the ASX100 in October. AMP (-22.6%), Iluka Resources (-19.0%) and Xero (-18.8%) were the worst performing ASX100 stocks in the month.
The MSCI World ex Australia Index returned -6.8% in October erasing most of the gains seen over the previous year. Emerging markets were slightly harder hit with the MSCI Emerging Markets Index returning -7.8% as investors avoided riskier investments. The main catalyst for the sell-off appears to be a growing apprehension of the impact of higher interest rates, although there is little sign in recent US economic indicators that growth momentum has slowed.
Asian markets were not immune to the US-led sell-off. The Shanghai Composite fell 7.7% while Hong Kong’s Hang Seng suffered a 10.1% fall and Singapore’s Straits Times Index fell 7.3%. Japan’s Nikkei 225 was down 9.1% in the month.
European markets fell proportional to their perceived risk with the German DAX returning -6.5%, the French CAC40 returning -7.2% and Italy’s MIB30 down 8.1%.
The Bloomberg Barclay’s Global Aggregate Bond Index hedged in $A returned -0.2% in October and has returned a paltry 0.2% over the past 12 months. In contrast, Bloomberg AusBond Composite Bond Index posted a 0.5% return in the month and 3.1% in the year. As noted last month, the differential largely reflects the different monetary policy trends in the US and Australia. As the US Federal Reserve has proceeded with its monetary tightening program, US bond yields across the yield curve have increased. In particular, 10 year government bonds have risen to 3.14% from 2.37% a year ago. In Australia, official interest rates remain on hold at 1.5% with few expecting a rate rise in the foreseeable future. As a result, Australian 10 year government bond yields have been largely unchanged at around 2.6% over the past 12 months. The US Federal Reserve is expected to again increase the fed funds rate by 25 basis points to a new range of 2.25-2.50% at its December meeting, although market expectations of a tightening have decreased in response to recent sharemarket falls.
The S&P/ASX 200 AREIT Accumulation index returned -3.1% in October outperforming the broader market as the defensive characteristics of property trusts were valued in the market rout. Global REITs were similarly shielded from the worst of the falls in global markets and returned -3.2%. Over the past 12 months, global REITs have significantly underperformed Australian REITS in line with the differential performance in bond markets.
The Australian dollar fell to US$0.7072 at the end of October with weaker commodity prices and global growth concerns the major drivers of the decline. Copper (-3.6%), Zinc (-4.0%) and Nickel (-8.6%) all ended the month lower. The negative tone meant that a further rise in iron ore prices to US$75.5 held little sway. Oil prices suffered significant falls with Brent oil falling 9.9% to US$74.6 despite the controversy around the Saudi killing of a journalist. Gold benefitted from the global concerns increasing by 2.3% to end the month at US$1215.
Key market returns at 31 October 2018
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