Monthly Commentary – SEPTEMBER 2018

Developments in the global economy

Business and consumer confidence in Australia remains fragile reflecting recent political uncertainty and mixed economic data. In contrast, US confidence has rebounded despite higher interest rates as households respond to robust labour market conditions and improving incomes.



The ABS Residential Property Price Index showed that capital city prices fell 0.7% in the June quarter and are down 0.6% over the past 12 months. However, there is significant variation between states with Hobart prices increasing 15.5% in the past 12 months while Darwin prices fell 6.1%. At the same time, consumer and business confidence has declined in response to recent political uncertainty. The NAB business confidence index fell to 4 in August from 7 a month earlier and a reading above 10 earlier in the year. Similarly, consumer confidence fell to 100.5 in September from 103.6 in August. Apart from political changes, consumers have also likely responded to increases in mortgage rates. On the positive side of the ledger, households were more positive about the employment outlook reflecting recent improvements in the labour market. The unemployment rate was 5.3% in August unchanged from a month earlier, and is the lowest rate since November 2012. Employment increased by 44,000 in August following a fall of 4,300 a month earlier.


The US Federal Reserve increased the fed funds rate range by 25 bps to 2.0-2.25% at its September meeting, and reaffirmed expectations that another hike was likely in December followed by a further two increases in the first half of 2019. The US equities market largely took the monetary tightening in its stride because it was expected and economic data continues to show robust growth. US retail sales continue to grow at a 6%-plus rate compared to a year earlier. At the same time, employment and wages growth remains robust suggesting consumption trends are likely to continue. Nonfarm payrolls increased by 201,000 in August and average hourly earnings have increased by 2.9% over the past 12 months. A fall in consumer confidence in August has been reversed with the Michigan consumer sentiment index increasing to 100.8 in September from 96.2 a month earlier.


The European Central Bank (ECB) has made slight downward revisions to its economic forecasts with GDP growth now expected to be 2.0% in 2018, 1.8% in 2019 and 1.7% in 2020. The forecasts are consistent with incoming data that suggests economic growth is on a stable, though lacklustre, path. Employment growth has consistently been at around 0.4% per quarter or a 1.5% annual rate for the last few years while wages growth has been stuck just below 2%. This is despite official interest rates being zero for the past two years. While the ECB is expected to keep interest rates unchanged well into 2019, they have confirmed that their quantitative easing program which has supplemented the zero interest rate policy will be discontinued at the end of the year.


Chinese inflation jumped 0.7% in August following five months of subdued and largely negative price changes. The increase was relatively broad-based with food, clothing, rent and fuel all increasing. In year-on-year terms, inflation is running at 2.3% which is well below the government’s 3% target. Other data continues to suggest a slight easing of Chinese growth with August vehicle sales 3.8% below year-ago levels and retail sales growth stuck at 9% compared to the 10% growth rate seen earlier in the year. Interestingly, house prices have accelerated growing by 7% year-on-year in August compared to the 5% growth rate seen through most of the past year.


Similar to Europe, the Bank of Japan has kept short-term interest rates at -0.1% at its September meeting. In contrast, they will continue to use quantitative policy to keep the 10-year government bond yield close to zero. The expansionary monetary settings are driven in large part by the subdued inflation outlook. Japanese core inflation was 0.9% in August, well below the Bank of Japan’s 2% target.


Developments in financial markets

Developed equities markets continue to enjoy robust returns, although the Australian market struggled in September, while emerging markets remain under pressure. A significant gap has opened in fixed interest markets with Australian bonds outperforming global bonds over the past 12 months.


Australian shares

The S&P/ASX200 Accumulation Index returned -1.3% in September, erasing August’s gain. Strength in the resources sector was not enough to offset weakness across most other sectors. Banks continue to suffer the fallout from the Royal Commission, but other sectors suffered similar if not greater declines. The worst performing sector was Healthcare which returned -7.7% in September, with CSL breaking its recent strong run and falling more than 10% while Cochlear also suffered a significant decline. Note, CSL is still up more than 50% over the past 12 months even with September’s fall. The Consumer Discretionary sector (-4.2%) and Utilities (-3.3%) also performed poorly. Best performing sectors were Materials (+4.2%), Energy (+4.3%) and Telecommunications (+2.7%). Nine of the top 10 performing stocks in the top 100 were mining or mining related companies. Northern Star (+20.0%), South32 (+15.1%) and Whitehaven (+10.9%) were the best performing stocks in the month. Worst performing stocks were CSR (- 12.5%), CSL (-11.0%) and A2 Milk (-11.0%).

International shares

The MSCI World ex Australia Index returned 0.8% in September following a 1.4% return in August. Emerging markets remain under pressure with the MSCI Emerging Markets Index falling 1.2% in the month. Over the past 12 months, developed market have returned around 12%, while emerging markets returns have been below 3%. Asian markets were mixed with Hong Kong’s Hang Seng Index falling 0.4% in September while the Shanghai Composite rebounded 3.5% following August’s 5.3% decline. The Singapore Straits Index rose by 1.4% and Japan’s Nikkei 225 was up 5.5% in the month and 18.5% in the year despite lacklustre economic growth. Major European markets were mainly higher with the exception of Germany’s DAX index which ended the month 1% lower. France’s CAC40 Index (+1.6%) and Italy’s MIB30 Index (+2.2%) both ended the month higher.

Fixed Interest and Cash

The Bloomberg Barclay’s Global Aggregate Bond Index hedged in $A and the Bloomberg AusBond Composite Bond Index both returned -0.4% in September, but a significant difference has opened up in returns over the past 12 months. Australian bonds have returned 3.7% while international bonds have returned a measly 0.9%. This reflects Australia’s higher yields, to begin with, combined with the small fall in yields seen over the past 12 months. In contrast, US 10-year government bond yields have increased to 3.06% from 2.33% over the same period. US 10-year and 2-year yields also increased in September, driven in part by the US Fed’s decision to again tighten monetary policy. Australian long bond yields also increased in the month although not to the same extent and shorter-term yields were largely unchanged.


The S&P/ASX 200 AREIT Accumulation index reversed some of August’s gains, falling by 1.8% in September. Global REITs were harder hit, falling by 2.6% in the month. It is difficult to ignore the relationship with bond yield changes in September and over the past 12 months. Both Australian and global REITS fell in September as bond yields rose while over the past 12 months, global REITs have struggled to achieve a 5% return as US bond yields have risen significantly while Australian REITs have posted a 13.2% return with bond yields moving lower.

Currency and commodities

The Australian dollar was largely unchanged, ending the month at US$0.7218 compared to US$0.7192 a month earlier. Iron ore prices increased by 3.7% to US$69.5 and oil prices increased again with Brent oil ending the month at US$82.8. There were significant increases in the copper (5.0%) and zinc (+8.0%) price while lead (-2.9%), tin (-1.0%) and nickel (-1.6%) ended lower. The gold price also ended 1.3% lower at US$1187.3.


Key market returns at 30 September 2018

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