Global share markets suffered their worst opening fortnight of a calendar year on record beset by concerns about the health of the global economy and with especial focus on China, high corporate debt burden in emerging economies, sharply falling oil prices and lingering fear about the pattern of US interest rate hikes. Share markets recovered some lost ground later in the month amid signs of stability in China’s economic readings, a hint of further monetary policy easing from the European Central Bank, a surprise move to negative interest rates by the Bank of Japan, a pause in removal of US monetary policy accommodation and signs of tightening oil supply. Despite the partial recovery late in the month, major share markets still lost ground through January with falls ranging from 2.5% for the British FTSE 100 to 8.8% for the German DAX. The US S&P 500 and Australia’s ASX 200 fell respectively by 5.1% and 5.5% in the month.

Australian credit weakened too through the month although was showing signs of improvement by month end. Falling share markets prompted safe-haven buying in government bond markets. The pause by the Fed at its January policy meeting plus the hint of approaching easier monetary policy by the European Central Bank and the policy easing by the Bank of Japan all helped to keep government bonds well bid. The US 10-year bond yield fell in January by 35bps to 1.92%, while the 30-year treasury yield fell by 28bps to 2.74%. The Australian 10-year bond fell by 25bps in the month to 2.63%. As is customary, the RBA board did not meet in January, but the first policy meeting of the year will be held this week and is expected by all analysts to leave the cash rate unchanged at 2.00%.

On the US economic data front the advance reading of Q4 GDP showed that growth slowed to 0.7% annualized pace from 2.0% in Q3. Monthly economic data was mixed strength ranging from very soft for most indicators of manufacturing activity – industrial production fell 0.4% in December after a 0.9% fall in November – through soft for retail sales – December -0.1% – to strong for non-farm payrolls, up 292,000 in January and most housing indicators. While the US economy is growing the pace is not strong enough to promote aggressive reduction in monetary accommodation by the Fed. At its January policy meeting the Fed decided to pause after hiking for the first time back in December. The accompanying statement noted the volatility in global financial markets but also mentioned the continuing strength in the US labour market, a hint that the Fed may resume lifting the Funds rate at its March meeting if the relative strength of US data permit.

In China, the data reports released in January were only slightly weaker than expected curtailing fears of an unexpectedly pronounced economic slowdown. Annual GDP growth edged down in Q4 to 6.8% y-o-y from 6.9% in Q3. On full year basis growth slowed to 6.9% in 2015 from 7.3% in 2014, but importantly with stronger growth in tertiary sector activity in 2015, 8.3% y-o-y from 7.8% in 2014, a sign that the rebalancing of key economic growth drivers along the lines that the authorities would like to see happen is starting to occur. The way the authorities dealt with selling pressure in China’s share and currency markets also caused some concern in financial markets during January, although with greater recognition towards month end that the moves in China away from totally regulated markets towards markets allowed to move comparatively freely could never be a frictionless process.

In Europe, the European Central Bank’s policy meeting late in January made no policy change as widely expected but ECB President Mario Draghi indicated that policy would be revisited at the next policy meeting in March, a signal that policy may be eased further. European economic releases were mixed in the month. November retail sales and industrial production both fell unexpectedly by respectively 0.3% and 0.7%. In contrast Europe’s unemployment rate improved unexpectedly, falling to 10.5% from 10.6%. Also in a world of comparatively weak growth in international trade, Europe is performing well with rising exports month-to-month and an increasing trade surplus, 22.7 billion euro in November from 19.9 billion in October.

In Australia, very strong employment growth evident in outsized increases in October, up 55,000 and November, up 75,000, effectively consolidated in December with only a 1,000 fall. The unemployment rate was unchanged in December at 5.8%, but well down from 6.4% at the beginning of 2015. Housing activity continued to show signs of topping out with home building approvals falling sharply by 12.7% in November. Household spending may have taken a stronger turn. Retail sales rose by 0.4% in November after lifting by 0.6% in October. Q4 inflation was also well-contained with the headline CPI rising by 0.4% q-o-q or 1.7% y-o-y and the average of the RBA’s two preferred underlying inflation readings – the trimmed mean and weighted median – up 0.55% q-o-q or 2.0% y-o-y. Annual inflation is sitting below the bottom of the RBA’s 2-3% target range in the case of the CPI and at the bottom of the range in the case of underlying inflation and looks set to stay low for some time, even according to the RBA’s own forecasts.

Looking ahead, we still see downside risks to Australia’s growth outlook through 2016 although in the immediate-term rather better economic readings may predominate allowing the RBA to keep monetary policy on hold in the immediate future, even though low inflation provides the ability to ease in need. The topping out of home building activity, persistent weakness in industrial commodity prices and accelerating rundown in parts of Australian manufacturing – notably automobile manufacturing point to a challenging year ahead. It is likely to take a few months for these downside risks to growth to become more evident. We see a strong likelihood that the RBA will start to consider that easier monetary conditions are necessary before the middle of the year. We pencil in two 25bps cash rate cuts in May and June taking the cash rate down to 1.50% in the second half of the year. Low interest rates are likely to persist in Australia throughout 2016 and probably through much of 2017 as well.