Economic Update – June 2015
Read the latest monthly market update – covering economic and investment market issues from around the world, as well as locally.
MARKET AND ECONOMIC OVERVIEW
• The Reserve Bank of Australia (RBA) cut the official cash rate from 2.25% to 2.00% on 5 May; this was largely expected by financial markets. The RBA subsequently left the official cash rate on hold on 2 June.
• The RBA noted that “the global economy is expanding at a moderate pace” but commodity prices have declined over the past year, generally reflecting increased supply. On Australia, the RBA noted “the available information suggests improved trends in household demand over the past six months and stronger growth in employment”. The key drag on growth will be weakness in business capital expenditure in both mining and non-mining sectors and subdued public spending.
• On the Australian dollar (AUD), the RBA noted “further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices” and “the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand”.
•The RBA also released its quarterly Statement on Monetary Policy and downgraded its GDP growth forecasts. For June 2015, growth was downgraded to 2%, for December 2015 to 2.5% and as at December 2016 to 2.75% – 3.75%.
• This indicates the Australian economy will remain below trend for longer than had been anticipated in February 2015 when forecasts were last published. Downgrades were largely driven by a later pickup in non-mining business investment and will eventually be helped by a lower currency and above average consumption growth.
• Inflation forecasts were also revised a little lower due to weaker product and labour markets, the unemployment rate is now forecast to peak around 6.5%.
• The 2015/16 Commonwealth Budget was handed down, with a deficit estimate of A$35.1bn, 2.1% of GDP. This compares with a deficit of A$41.1bn, 2.6% of GDP, in 2014/15. The Budget deficit will slowly improve to A$6.9bn in 2018/19, before a return to surplus currently expected in 2019/20.
• The unemployment rate edged up to 6.2% in April, with 2,900 jobs lost. Annual employment growth is now 1.5%, a reasonable result given below-trend economic growth.
• The US Federal Open Market Committee (FOMC) did not meet in May, with its next meeting scheduled for 16-17 June 2015. Attention is on the first interest rate hike, currently expected in September 2015.
• In May, the Federal Reserve System (the Fed) Chair Janet Yellen delivered a speech titled ’The outlook for the economy’ and noted “one sign of a stronger labor market is that the number of job openings has risen impressively, and another is that more workers are quitting their jobs, signalling greater confidence in their ability to find a new job. I say ‘approaching’, because in my judgment we are not there yet”.
•Yellen also noted: “if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy” and “to support taking this step, however, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term”.
•On employment, there were further positive signs in the month with the unemployment rate falling to 5.4% in April with 223,000 jobs added. This is the lowest unemployment rate since May 2008 and coincides with a 15 year low in initial jobless claims and a 14-year high in job openings.
• However, inflation remains weak. Headline inflation fell to -0.2% per year in April, largely driven by lower gasoline prices and a stronger US dollar.
• The European Central Bank (ECB) did not meet in May, with the next meeting scheduled for 3 June 2015. The ECB however, did announce it bought public and private assets worth €63bn in May under its expanded asset purchase programme. This takes the total of the public sector purchase programme holdings to €146.7bn at the end of May.
• Negotiations were ongoing with Greece over the month to disburse bailout funds under its current program. No progress has been made after five months of negotiations. Greece has €1.7bn of payments to the International Monetary Fund due in June, with a deal required at some point over the month to disburse funds required for this repayment. The main sticking points for a deal remain pension and labour market reform and budget surplus targets.
• Economic data released included flash estimates of Q1 2015 GDP, with overall growth in Europe recorded at 0.4% per quarter and 1.0% per year. Spain, France, Germany and Italy all grew, while Greece contracted by 0.2% per quarter with the economy recording growth of just 0.3% per year.
• The Bank of England (BoE) left policy unchanged at its 11 May 2015 meeting, as expected. The Bank Rate was unchanged at 0.5% and the stock of asset purchases remained at £375bn.
• The UK General Election was held on 7 May 2015 and in somewhat of a surprise David Cameron and his Conservative government was re-elected with a majority. The final results were The Conservatives (330 seats), Labour (232), the Scottish National Party (56), the Liberal Democrats (8) and the United Kingdom Independence Party (1).
• One outcome from the election was the commitment to hold a referendum on European Union membership in the next two years.
• The unemployment rate fell to 5.5% from 5.6% with 202,000 jobs added in the three months to March.
• The Bank of Japan’s (BoJ) policy board convened on 22 May 2015 and left its qualitative and quantitative easing (QQE) program at an annual increase of Y80trillion to its monetary base. BoJ Governor Kuroda sees inflation reaching 2% in H1 2016, but won’t hesitate adjusting policy if needed.
• The Peoples Bank of China (PBOC) cut the 1-year lending rate to 5.1% from 5.35% on 10 May 2015. This is the third rate cut since November 2014. The PBOC also raised the ceiling for deposit rates to 1.5 times that of the benchmark deposit rate, from 1.3 times, in an effort to continue down the interest rate liberalisation path.
The AUD was mixed in May, recording falls against the US dollar (USD), sterling and euro. The Australian dollar fell 3.3% to US$0.7644 in May, assisted by the RBA rate cut, weaker economic data and renewed strength in the USD. The falls came after gains recorded in April.
Commodity prices were mixed in May, with recovery in oil, gold and iron ore and weakness in metal prices.
The iron ore price and oil price also rose in May. Metal prices were weaker after good gains in April. Aluminium, nickel, lead, copper and zinc all fell. The gold price rose just 0.5% in May to US$1190.55 an ounce. The gold price has been relatively stable since mid-January.
Australian shares were little changed in May, with the S&P/ASX 200 Accumulation Index adding just 0.4%. With one month of the financial year to go, Australian shares have added 11.6% in FY15.
There was strength in several areas of the market in May. Stocks in the Industrials, Health Care and Materials sectors, for example, tended to perform well. Weakness in the heavyweight Financials sector prevented the Index from making further progress.
Three of the ‘big four’ banks reported semi-annual earnings early in the month. The actual results were overshadowed by ongoing concerns over capital requirements in the sector. Regulator APRA is rumoured to be considering an increase in minimum capital levels, which has focused investor attention on balance sheets in the sector. In anticipation of such a move, National Australia Bank completed a A$5.5bn equity raising during the month, some of the proceeds of which will be used to shore up the company’s capital position.
The S&P/ASX 200 Property Accumulation Index returned 2.9% in May, 2.4% ahead of the broader Australian share market. The interest rate cut by the RBA on May 5th proved supportive of this income-generative sector.
Listed property markets offshore declined in May. Overall, the UBS Global Property Investors Index fell by 1.3% in US dollar terms. The UK was the strongest-performing region. Continental Europe lagged, returning -6.6%.
Global sharemarkets were mixed in May, with the US market moving higher, falls in some European markets and mixed markets in Asia. Protracted negotiations on the next phase of the Greek bailout unsettled markets as did timing of the first rate hike in the US. Liquidity through central bank purchases continues to assist equity markets in moving higher, despite stretched valuations, particularly in the US.
Overall the MSCI World Index rose 0.1% in USD terms and 3.2% in AUD terms given the fall in the AUD over the month.
US markets moved higher with some evidence of a recovery in US data in early Q2 2015, and a slowdown in USD appreciation.
The S&P 500 Index rose 1.0% in the month, the Dow Jones was up 1.0% and the NASDAQ rose 2.6%. Equity markets in Europe were mixed, the German DAX fell 0.4% in May, France fell 0.8% and Spain was down 1.5%. In contrast Italy rose 2.0% and the Athens Stock Exchange rose 1.2% despite no resolution on Greek funding. Equity markets appear sanguine about the risks of the Greek default and exit from the Eurozone. Instead currency markets and bond markets were more volatile. The euro fell 2% against the US dollar in May.
The UK FTSE 100 was up 0.3%, with the re-election of the Conservative government. There are some expectations that this could lead to more aggressive fiscal consolidation, although this would be offset by less monetary policy tightening by the Bank of England.
GLOBAL EMERGING MARKETS
Emerging market (EM) equities fell sharply in May, down 4.2% in USD (MSCI EM Index) after strong gains in April. The MSCI Emerging Markets Index underperformed the broader developed market index. In AUD terms, the index fell 0.9%. The index was not helped by the stronger US dollar in May, which rose 2.4% over the month. All regions suffered losses, with MSCI Latin America reversing gains in April, falling 7.0% in May, with sharp falls in Argentina and Brazil, while Mexico gained ground. Brazil raised rates again in late April, with the SELIC rate now 13.25%, the highest since 2008.
Source: Colonial First State. This information is current at 9th June 2015 but is subject to change.