Two major unexpected events are expected to have implications on the Australian economy; firstly 7 million hectares of bush destroyed, more than 25 deaths, significant loss of livestock etc. In the short term there will be negative impact on the domestic economy as the following activities will be impacted; farming, manufacturing, transport, tourism and business generally. Economists estimate a detraction from GDP due to the bushfires of around 0.4% starting in the December quarter but mainly impacting the March quarter before stabilising and then moving into the rebuilding phase. The rebuilding phase should reverse much of the drag on the economy and potentially put additional pressure on the RBA to cut interest rates and also on the Federal Government to speed up the introduction of fiscal stimulus in the form of personal tax cuts.
The escalating concern that a new coronavirus originating from the Chinese city of Wuhan in Hubei province will become a global pandemic is expected to have in the short term a negative impact on the Australian economy. However, based on history most pandemics have taken 6-18 months to run their course and peter out as measures are taken to slow their spread through hygiene, quarantining, preventing travel etc. Given Australia’s reliance on China, commodity prices are down, along with the Australian dollar and the number of expected tourists. However, barring a global pandemic, based on experience with SARS, bird flu, swine flu and Ebola, in the short term, share markets and bond yields will fall in response to negative news but rebound once it is clear the pandemic is, under control.
Bulk commodity prices were mixed in January. Iron ore fell $7.06/t to $84.94/t, but both thermal and metallurgical coal prices rose modestly. Brent crude declined $7.84/bbl to $58.16/bbl, the lowest in over a year. Gold prices rose $69.45/oz to $1,584.20/oz, near the highest since 2013.
The USD rose 1.0% m/m in January. All G10 currencies fell against the USD. The Australian Dollar (-4.8%) and New Zealand Dollar (-4.1%) were the worst performing currencies, while the Swiss Franc (-0.2%), Japanese Yen (-0.4%) and British Pound (-0.5%) were the best performing currencies.
Read the full January 2020 Market Review here
2019 Year in Review
2019 can be considered once more as the year of the bankers. Bankers have managed to reinflate financial markets by easing monetary policies, implemented through reductions in interest rates (e.g. US and Australia), or in the case of the Eurozone, through expansion in the central bank ’s balance sheet.
Investors started 2019 with anxiety after a sharp decline in share markets in the last quarter of 2018. In early 2019 Chairman Powell signalled that the US Federal Reserve (the Fed) has pivoted from tightening bias to a more neutral, “data dependent” policy stance. The Fed subsequently reduced policy rates by 75 basis points to a target range of between 1.5% and 1.75%. Other central banks followed suit. The Reserve Bank of Australia (RBA) reduced the target cash rate by 75 basis points to 0.75%. The European Central Bank (ECB) brazenly announced that it had reduced the interest rate on deposit facility by 10 basis points to negative 0.5% and would resume net asset purchases at a monthly pace of 20 billion Euro per month. It also wrote an open cheque by announcing that the asset purchase program would remain for as long as necessary.
Easing monetary policy comes amid deteriorating economic conditions, especially in manufacturing sectors. The Purchasing Managers’ Index (PMI) suggested that the manufacturing sectors in the US, Europe and China were all experiencing recessionary conditions by the end of 2019.
As the tide of central banks’ lifted all asset classes, investors have been richly rewarded for taking risks in 2019. The year-to-date returns of the main asset classes are shown in Table 1 – all of which returned positive numbers. Australian bonds returned just over 7.3% as the RBA reduced policy rates three times during 2019. Global sovereign bonds (hedged) also delivered a very solid 7.2% to investors – impressive considering around 1/3rd of the global sovereign bonds universe comprises negative-yielding bonds. Further out on the risk curve, listed real estate assets benefited from falling bond yields and generated returns above 20%. Both global and Australian shares performed strongly despite concerns about economic recessions, lower earnings growth and expensive valuations, while emerging market shares have been a relative laggard.
Read the full December 2019 Market Review here
It is being said that Australians are hurting the economy by not spending, with household savings soaring as consumer spending plummets to its lowest level since the global financial crisis.
The much-anticipated economic turning point still seems some way down the road, with the key measure of economic growth, GDP, growing at a well below average annual pace of 1.7%. The economy grew just 0.4% over the September quarter, according to the ABS, below expectations and slower than the previous two quarters.
CBA Chief Economist Michael Blythe said weakness in household spending was the biggest threat to what was becoming a “two-speed” economy i.e. the contribution of the public sector was in stark contrast to weak private spending. Private sector spending fell by 0.1% for the quarter and down 0.3% for the year, while public spending was up 1.1% and 4.8% respectively.
According to the most recent ABS report, the Australian economy advanced a seasonally adjusted 0.4% in the September quarter of 2019, slowing from an upwardly revised 0.6% growth in the previous period and missing market expectations of a 0.5%.
Read the full November 2019 Market Review here
In Australia, house prices rose strongly again in October +1.2% month-on-month to take the year-on-year decline to -2.3% after -3.9% in September. Strongest gains occurred in Sydney and Melbourne. Q3 CPI rose +0.5% over Q2 and +1.7% for the year, still below the RBA’s +2%-3% target band.
The recent rebound in house prices removes the downside risk from a deep consumer deleveraging cycle.
Growth in retail sales of +0.2% in September was poor, not only half the consensus expectation, but the average monthly growth of +0.2% over the past six months shows little gain from low and middle income tax cuts and three interest rate reductions. Westpac CEO Brian Hartzer said consumers remain “cautious”, with flat wage growth constraining consumer spending. The September quarter retail sales data will feed into estimates for 3Q GDP. Markets continue to price in a 50-50 chance of a rate cut at the February 4 2020 meeting. Cash and bank deposits are likely to continue to provide poor returns.
NAB recently published their NAB Australian Wellbeing Report Q3 2019 (How Australians think and feel about their emotional and financial wellbeing). NAB’s Australian Wellbeing Index rose for the third straight quarter in Q3 2019 to 65.7 points – the second highest reading since the survey began in 2013. Australians reported their highest levels of happiness and life satisfaction in the history of the survey, with life worth also at an equal survey high. Despite these positive trends, one of the four dimensions of the wellbeing index worsened – anxiety. Highly anxious people also ranked their overall wellbeing much lower than those with low anxiety. Not only did overall anxiety rise, but anxiety specifically arising from our current financial position also increased.
Read the full October 2019 Market Review here
Download here – Monthly Market Commentary – September 2019
The direction of the Australian economy rests, to an extent, with the Reserve Bank of Australia (RBA) Governor Philip Lowe’s regular speeches. In September the RBA Governor’s “An Economic Update” speech left the door wide open for more rate cuts. Governor Lowe remains optimistic that the Australian economy has seen a “gentle turning point” but his comments around increasing downside risks to global growth, weaker than expected GDP growth, spare capacity in the labour market, a stalling in the pick-up in wages growth, it being “not unreasonable” to expect further easing and that markets should be surprised if the RBA didn’t “act consistent with our mandate” are all very dovish.
Both skilled job vacancies and the ABS measure of economy wide job vacancies fell (led by NSW and Victoria) pointing to slower jobs growth ahead and a further rise in unemployment. What’s more, ABS employment data by industry shows that all of the jobs growth in Australia over the last year has come from the public sector – which perhaps explains why jobs growth has been so strong relative to weak GDP growth. The CBA’s business conditions PMIs rose in September, but they tend to be a bit volatile and they are still well down from 2017 highs.
The pick-up in auction clearance rates that has occurred in Sydney and Melbourne this year is now being accompanied by higher listings and sales suggesting that it has legs. Key to watch for now will be whether clearance rates continue to hold up as the spring selling season heats up and whether housing finance commitments continue to rise. many commentators forecast that after a further bounce, price gains will be constrained through next year, due to still tighter lending standards, unit supply, slow growth and rising unemployment.
Cash and bank deposits are likely to provide poor returns as there is a strong possibility that the RBA cuts the official cash rate to 0.5% by early next year.
The A$ is likely to fall further to around US$0.65 as the RBA cuts rates further. Excessive A$ short positions, still high iron ore prices and the US Fed easing will provide some support though with occasional bounces and may avoid a sudden fall in the A$.
Read the full September 2019 Market Review here
The ongoing rally in Australian government bond yields received a further boost following an escalation in US-China trade tensions and forward guidance from the Reserve Bank of Australia (RBA) that an extended period of low interest rates was required for it to meet its employment and inflation objectives. Sentiment shifted from ‘risk-on’ to ‘risk-off’, with equity markets weaker and credit spreads widening.
Australian economic readings continued to provide mixed signals and partial indicators point to another quarter of sub-trend growth in the upcoming release of the June quarter national accounts. While retail sales rose by a better than expected 0.4% in the month of June, volume growth over the quarter was up by only 0.2% and points to sluggish consumption growth.
Construction work completed data for the June quarter was softer than expected, falling 3.8%. Total residential spending fell 5.1% and points to dwelling investment being a drag on economic growth over the June quarter. Business investment remains sluggish, with private capital expenditure falling 0.5% over the June quarter.
On the stronger side was Australia’s trade balance, which moved from a $6.1bn surplus to an $8bn surplus in June. Net exports are poised to add to economic growth over the June quarter.
Against this backdrop, the RBA released its updated economic forecasts. Their central case view is for economic growth to lift from 2.5% in 2019, to 2.75% in 2020 and 3% in 2021. Given the amount of slack that still has to be absorbed, the RBA have inflation lifting at a slower rate, with core inflation only reaching 2% in the second half of 2021.