For a more comprehensive roundup of the week, listen to Stephen’s full report here.
Global economic readings were again mixed strength through April with positive surprises in the economic data, mostly confined to Europe and Australia. The monthly data readings from the US are consistent with GDP growth having slowed further in Q1 2015 to around 1% on an annualized basis. In China, growth has slowed in Q1 to 7.0% y-o-y and further slowing seems likely on recent monthly economic readings. European growth may have accelerated above 1% y-o-y in Q1 while Australian economic growth may have stabilized – if not improved slightly – in Q1 on the basis of still firm international trade, strong housing activity and small improvement in retail sales. Central banks remain committed to maintaining accommodating policy conditions, although the US Fed is still likely to lift its funds rate from near-zero later in the year and the outlook for when the RBA will next lower its cash rate is hazier than it seemed a month ago.
US economic readings published in April were still very mixed-strength. The monthly non-farm payrolls, which had previously been very strong, took a breather and rose in March by only 124,000; a long way short of market expectations averaging +247,000. The unemployment rate however, held at an 8-year low of 5.5%. US housing activity was either very strong in March based on existing home sales up 6.1% in the month, or very weak, with new home sales down by 11.4%. Forward-looking pending home sales were still strong in February, up by 3.1% after lifting 1.2% in January. March retail sales were a little softer than expected, up 0.9% after falling in both January and February. March industrial production was disappointingly weak, down by 0.6%. Consumer sentiment and consumer confidence, however, continue to hold up well and near their best levels in eight years.
Inflation in the US remains very tame and well below 2% y-o-y for producer prices and the CPI. The speeches of various Fed governors and presidents, plus the minutes of the most recent Fed policy meeting, all point to no change in the funds rate until at least June, but with discrepancy beyond then ranging from rates starting to rise from around mid-year, to no rate change until well into 2016. The one area of agreement among senior Fed officials is that the first tightening move has become highly dependent upon how US data pans out and for the time being, the data is showing softer on balance.
In China, the monthly economic readings continued to run more softly than expected. In March, exports and imports fell respectively by 15.0% y-o-y and by 12.7% y-o-y. The run of indicators of domestic spending and activity in China were also soft, with March industrial production slowing to a seven-year low of 5.6% y-o-y from 6.8% in February; March retail sales slowing to 10.2% y-o-y from 10.7% in February; and urban fixed asset investment spending slowing to 13.5% y-o-y from 13.9% in February. Remarkably, Q1 GDP growth slowed in line with market expectations to 7.0% y-o-y from 7.3% in Q4 2014, even though the monthly economic readings seemed consistent with a weaker result. Growth is clearly threatening to run too weakly from the point of view of the authorities. In the wake of the data releases, the Peoples’ Bank of China cut the banks’ reserve ratio requirement by 100 basis points (the biggest cut since the depths of the global financial crisis back in 2008) to 18.5%.
In Europe, monthly economic readings remained consistent with small improvement in European economic growth, but the positive surprises were scantier than in February and March. The best of the positive surprises – and the strongest – were a tripling in the size of Europe’s trade surplus in February to 22 billion euro and with impressive monthly gains in exports, +2.0% m-o-m, and imports +2.6%. European industrial production also rose much more strongly than expected, by 1.1% m-o-m in February. ECB President Draghi noted that after the most recent ECB policy meeting, risks to the European economic outlook had become more balanced notwithstanding simmering issues relating to Greek sovereign debt. Draghi also reaffirmed that ECB purchases of assets each month totaling 60 billion euro would continue as planned through to late 2016.
In Australia, retail sales took a slightly stronger turn in February rising by 0.7% after an upwardly revised 0.5% gain in January. The labour market has been stronger than expected too with employment lifting by 37,700 in March after an upwardly revised gain of 41,900 in February. The unemployment rate has drifted lower early in 2015, from 6.3% in January, to 6.1% in March and against general expectations that it would rise. However, forward looking indicators of the employment market, such as job vacancy surveys, are tipping softer and consumer sentiment, measured by the monthly Westpac-Melbourne Institute survey weakened in both March and April.
Australian inflation held low in Q1 with the CPI up 0.2% q-o-q and 1.3% y-o-y, down from 1.7% y-o-y in Q4 2014. Annual inflation has been falling faster than short-term interest rates and the real cash rate has lifted effectively by more than one percentage point over the past year and notwithstanding the 25bps cash rate cut back in February. Rising Australian real short-term interest rates may be playing a part in holding up the Australian dollar higher than the RBA would like to help rebalance the economy. The Australian dollar has appreciated against the US dollar and on trade weighted basis since that last rate cut in February.
While the RBA left the cash rate unchanged at 2.25% at both its March and April policy meetings and the rate outlook seems hazier to some in the wake of recent firmer economic readings, our view remains that a 25bps cash rate cut to 2.00% is likely in May and will probably be followed by another 25bps cut to 1.75% later in the year. Notwithstanding the improvement in some economic indicators of late, the economy is growing sub-par and is facing unnecessary headwinds from rising real short term interest rates and an appreciating Australian dollar. Both are issues that the RBA can address by cutting the cash rate further.