Risk assets were mostly stronger in November reflecting signs of improving global economic growth as well as a positive reaction to Donald Trump’s surprise US Presidential Election win. Financial markets took a view that some of President Elect Trump’s policy promises relating to more government spending, lower taxes and less business regulation could prove positive for US growth and American companies. Financial markets are also choosing to ignore for the time being the negative aspects of Trump’s policy promises such as less immigration, higher trade tariffs and bigger budget deficits and higher interest rates. Among major share markets the best gain during the month came from Japan’s Nikkei, up by 5.0%. The US share market made a new record high and the S&P 500 was up by 3.4%. The only major share market to fall in the month was the British FTSE 100, down by 3.6% and reflecting a legal set-back to Prime Minister, Theresa May’s Brexit negotiation plans. Australia’s ASX 200 was up by 2.3% in November.
Australian credit was softer in November undermined by a continuing and sharp rise in bond yields. Signs of stronger global economic growth, especially in the US, continued to catch-out government bond markets priced for slow growth with persistently low inflation. Trump’s surprise election win spelling a potential shift in US policy to debt-funded fiscal expansion added momentum to the upward pressure on bond yields. In addition, the US Federal Reserve provided repeated hints that the time to lift its funds rate again was drawing closer, while various senior RBA officials, including new Governor Phillip Lowe, commented that Australia’s economic outlook was showing signs of improvement and that pushing down the cash rate further was neither necessary and potentially destabilising. The US 10-year bond yield rose sharply again in November, up 56bps to 2.39%, while the 30-year Treasury yield was up by 38bps to 2.96%. The Australian 10-year bond yield rose by 40bps to 2.74% and the upward pressure on bond yields in October and November has led many financial institutions to start lifting their lending interest rates even though the RBA’s cash rate was unchanged at 1.50% in both October and November.
Returning to the US economy, the strongest proof of improving economic activity is in the pattern of GDP growth so far in 2016 from 0.8% annualised pace in Q1 to 1.4% in Q2 and 3.2% in Q3 on latest revision. Importantly, household spending is generating much of the improvement in US growth and previously weak business investment spending has risen in Q2 and Q3. Business surveys and readings of consumer confidence and sentiment are stronger in October and November pointing to stronger GDP growth carrying through Q4 2016 at least. Indicators of labour market conditions were somewhat mixed in October and November but the US unemployment rate fell to a decade low of 4.6% in November. Comments from senior Fed officials, including Chairman Janet Yellen, imply that there is only limited excess capacity in the US economy and that the time is drawing closer to lift the Funds rate. It is now expected commonly that the Fed will hike the funds rate by 25bps to 0.75% at its mid-December policy meeting.
In China, the signs are that GDP growth is stabilizing around the 6.7% y-o-y level recorded throughout 2016 so far. The October economic readings were not quite consistent with the view of how drivers of economic growth should rebalance from the point of view of the government. Retail sales in October ran softer than they would like at 10.0% y-o-y, down from 10.7% in September, while urban fixed asset investment spending edging up to 8.3% y-o-y, from 8.2% was not entirely welcome representing in part too much residential property construction driven by near runaway increases in house prices, up 12.3% y-o-y in October. The residential construction boom in China running hand-in-hand with property speculation may push GDP growth a little higher through Q4 2016 and early 2017, but it is likely to come with significant costs including rising social unrest among those migrating from the country to very expensive cities and making worse the quality of banks’ lending books. Managing China’s economy is always difficult, but looks set to become even more difficult later in 2017.
In Europe, GDP growth has stabilized at 1.6% y-o-y in Q3, inflation has edged up to 0.6% y-o-y in November and the unemployment rate has broken below 10%, down to 9.9% on revision in September and 9.8% in October. What economic improvement there has been in Europe, however, is patchy between member states and still shows that only Germany has made any consistent improvement over recent years with other countries still struggling to regain the levels of economic output achieved a decade ago. Political pressure in Europe continues to grow. The British Brexit vote was one marker, but several more votes in Italy, the Netherlands, France and Germany will test the cohesiveness of the EU over the next 12 months. Economic growth prospects remain too weak and too patchy in the EU to reduce the risk of EU disintegration, a factor likely to remain a cause of pronounced volatility in financial market sentiment from time-to-time.
The Australian economy is showing signs of reasonable past economic growth but fading economic strength in Q3 and Q4 2016. Partial indicators of Q3 GDP growth due this week have all been quite soft so far including Q3 real retail sales, down by 0.1% q-o-q, and Q3 private new capital expenditure, down by 4.0% q-o-q. There are still patches of strength in home sales in Sydney and Melbourne, but there are also increasing signs that some property developers are facing more challenging conditions. Home building work done in Q3 fell for the first time in more than a year, while home building approvals fell very sharply in September and October and multi-occupancy home building approvals were down more than 40% y-o-y in October. Rising home lending interest rates plus still very weak wages growth, up a record low 1.9% y-o-y in Q3, all spell downward pressure developing in the housing market with carry through to economic growth in general. The RBA, however, is focusing more on diminishing headwinds to Australian economic growth from the likes of a turn for the better in export commodity prices and less pronounced falls in mining investment and is providing strong indications that it will not adjust the 1.50% cash rate for some time. It will take time to prove that Australian economic growth is moderating and cause the RBA to review its economic outlook. At this stage we see the RBA leaving the cash rate unchanged at 1.50% over the next year.