Risk assets were mixed-strength in November. European and some Asian sharemarkets were stronger reflecting some hope of easier monetary conditions ahead. The US equity market trod water, ahead of an increasingly likely first hike in the US Federal funds rate, probably at the Fed’s mid-December policy meeting. The Australian sharemarket weakened, reflecting further weakness in industrial commodity prices on signs of still relatively soft global economic growth. The Australian ASX 200 fell by 1.4% in November, but it was something of an odd man out with the US S&P 500 up by 0.1% in the month; the Eurostoxx 50 up by 2.6%; and Japan’s Nikkei up by 3.5%.
Australian credit lost ground in November reflecting softness in Australian risk assets in general. In interest rate markets, expectation that a first US rate hike is not far away caused government bond yields to drift higher over the month. The US 10 and 30 year bond yields rose respectively by 9bps to 2.23% and by 7bps to 2.99%. The Australian 10-year bond yield rose by more than its US equivalent by 23bps to 2.84% in November. At the beginning of November the RBA again left its cash rate unchanged, essentially awaiting more information about the economy before deciding whether there is any need to cut rates further. Interestingly, the RBA’s quarterly Monetary Policy Statement released a few days after the meeting reduced the RBA’s near-term growth and inflation forecasts, normally an indication that more monetary policy accommodation is needed.
On the US economic data front September and October economic readings were again mixed strength although nonfarm payrolls took a noticeably stronger turn. October non-farm payrolls came in initially up 271,000, the strongest reading this year and then were revised up to 298,000 when the November report came out showing a bigger than expected lift too for the month of November, up 211,000. The unemployment rate was steady at a low 5.0% reading in both October and November and average hourly earnings rose relatively firmly too in both months. The second reading of US Q3 GDP was revised upwards to 2.2% annualized growth from an initial reading of 1.5%. Senior US Federal Reserve officials, including chairman Janet Yellen, have indicated that a first hike in the Federal Funds is likely at the approaching mid-December policy meeting, although the path of rate increases beyond is not pre-determined and will be data dependent.
In China, October economic readings were mostly still quite soft. Exports fell by 6.9% y-o-y after falling by 3.7% in September. Imports fell by 18.8% y-o-y after falling by 20.4% in September. CPI inflation was weaker than expected at 1.3% y-o-y in October and strong disinflationary pressure persisted in producer prices, down by 5.9% y-o-y. October urban fixed asset investment spending rose by 10.2% y-o-y down a touch from 10.3% in September and industrial production hit a new post-global financial crisis low point at 5.6% y-o-y, down from 5.7% in September. The only bright news was that annual growth in retail sales lifted slightly to 11.0% y-o-y in October from 10.9% in September. The rebalancing of economic growth drivers continues in China, but not to the extent yet of lifting overall economic growth implying the need for even more expansionary policy settings.
In Europe, The European Central Bank’s policy meeting early in December disappointed by not easing policy as aggressively as the guidance in several speeches given earlier by ECB President Mario Draghi seemed to imply. It seemed to most from those speeches that the ECB’s key monthly asset purchase program totaling 60 billion euro would be increased. The purchase program was left unchanged although the proposed end date was extended to at least March 2017 from September 2016. The ECB deposit rate paid to banks was also cut by 10 bps to -0.30%. The disappointment came amid mixed European economic data readings. The unemployment rate edged down to 10.7% in October, the lowest since January 2012, but retail sales remained lack-luster falling by 0.1% in October after falling a similar amount in September. European inflation also remains very weak with the flash reading for November up only 0.1% y-o-y.
In Australia, monthly economic readings remained mixed strength, although employment growth continues to improve – up 58,600 in October reducing the unemployment rate to 5.9% – and Q3 GDP growth was stronger than expected, up 0.9% q-o-q and up 2.5% y-o-y. The stronger-than-expected GDP result owed all to a surge in net exports, contributing 1.5 percentage points to growth in the quarter. Domestic demand fell in the quarter as did real net national disposable income, down by 0.1% q-o-q and down 1.0% y-o-y. Potential weakness in economic growth remains an issue although one that is unlikely to become an acute concern unless employment growth takes a noticeably weaker turn. The employment outlook is also the key to the outlook for the housing market, showing signs of a relatively orderly topping out process that will probably only become a disorderly rout if the unemployment rate rises significantly.
We see the RBA in wait-and-see mode. If economic conditions show little sign of deterioration the RBA may continue to judge that the current cash rate setting is appropriate for some time. We still suspect that the economy will experience a noticeably softer patch through the first half of 2016 as the impetus to growth from housing starts to slow and the unemployment rate starts to drift higher. We see a strong likelihood that the RBA will start to consider that easier monetary conditions are necessary around May next year. We pencil in two 25bps cash rate cuts in May and June next year taking the cash rate down to 1.50%. We expect that low cash rate to persist in to 2017. In any event, the cash rate in Australia is unlikely to be any higher than 2.00% for many months to come, probably all of 2016 and most of 2017 as well.