For a more comprehensive round up of the week, listen to Stephen’s full report here.
The Australian credit market was softer through the month, but was more resilient than the local equity market. In interest rate markets more generally, yields fell over the month even in the wake of the US Federal Reserve ending its asset purchase program at its late October policy meeting. The European Central Bank left policy unchanged at its November meeting but indicated again it could do more. The Reserve Bank of Australia again left the cash rate on hold at 2.50% at its early November policy meeting with indication of stable rates for some months ahead. The RBA’s quarterly Monetary Policy Statement reaffirmed the stable interest rate message on the basis of sub-trend economic growth persisting to late 2015 and inflation contained within 2-3% target band throughout 2015 and 2016. Central banks on policy hold or actively easing kept bond yields low. US 10 year and 30 year treasury yields finished November at respectively 2.16% and 2.89%, both 18 basis points (bps) lower than at the end of October. The Australian 10 year bond yield fell even more than its US counterpart falling by 26bps and finishing November at 3.02%.
On the economic data front, US indicators showed a second consecutive quarter of strong growth, revised upwards on the second report to 3.9% annualized GDP growth in Q3 after 4.6% in Q2, the strongest two-quarter growth in a decade. The October non-farm payrolls report was a touch softer than expected at +214,000, but the unemployment rate edged down to a six-year low of 5.8% from 5.9% in September helping to underpin optimism among US households. October economic readings in China were mostly softer than expected but the Peoples’ Bank of China responded by cutting interest rates for the first time since 2012, a sign that the authorities do not want economic growth to slide further. In Europe, economic readings were mostly a little firmer than expected, but still quite soft. In Australia, monthly economic readings were mixed with unexpectedly weak September home building approvals, down 11.0% m-o-m, but stronger than expected retail sales, up 1.2% and up 1.0% in volume terms in Q3. Employment was firm in October, up 24,100, but the unemployment rate was steady at 6.2%. Q3 private capital expenditure increased surprisingly by 0.2% with investment by the services sector growing strongly and more than compensating for falling investment in the mining sector.
Looking ahead, global economic growth looks set to improve further late in 2014 and in the first half of 2015. Growth in China and Europe look like needing assistance from easier policy settings but there are improving signs that this will be forthcoming. In Australia, the headwind to growth from weak growth in national income looks set to intensify as collapsing energy prices in the wake of the late November OPEC meeting reinforce the downward pressure on Australian income from falling iron ore prices. Weak income growth will probably add to factors keeping annual inflation very well contained. The RBA is very firmly on monetary policy hold, but the weakness in Australian national income implies some risk that the RBA may cut the cash rate further. Housing is the one strong part of the Australian economy, but even that may soon take a softer turn on falling rental yields in the housing investment market and indications of some restrictions being imposed before long on interest only home loans. Any rate hike is further away than we thought likely previously and it is possible that the cash rate may be cut at some point in 2015 if commodity prices continue to decline potentially causing Australian national income to fall.