For a more comprehensive round up of the week, listen to Stephen’s full report here.
Risk Assets strengthened sharply through the second half of October after falling through the first half. The power of the rebound in the second half was sufficient to lift the US S&P 500 by 2.3% over the month to a record high. Evidence of strong US economic growth helped to boost investor sentiment reinforced by a surprise expansion of asset purchases, or QE, by the Bank of Japan at its policy meeting late in the month. Elsewhere, economic readings were comparatively soft and that was reflected in the performance of the respective share markets. The Australian ASX 200 enjoyed the strongest rebound over October, up 4.4%, but only because it suffered the worst fall, -5.9%, in September. Japan’s Nikkei lifted very strongly on the announcement of greater QE, but was up by only 1.5% in the month. European equity markets rebounded in the second half of October too, but were still down over the month. The Eurostoxx 50 was down by 3.5% while the British FTSE 100 was down by 1.2%.
Credit markets tracked the gyrations in equity markets through the month although the moves were less pronounced. The Australian credit market gave up ground in the first half of October, but improved sharply in the second half. In interest rate markets more generally, yields fell over the first half of the month and, even after the back up in yields later in the month, still finished lower. The US Federal Reserve ended its asset purchase program in October, but still implied that even with an improving economy it would be quite a while before its funds rate would start to lift from zero. The European Central Bank left policy unchanged at its meeting but indicated it could do more. The Bank of Japan surprised by increasing its annual asset purchase target to 80 trillion yen from 60-70 trillion yen. The Reserve Bank of Australia again left the cash rate on hold at 2.50% at its early October policy meeting, with an indication of stable rates for some months ahead. Central banks on policy hold or actively easing kept bond yields low. US 10 year and 30 year treasury yields finished October at respectively 2.34% and 3.07%, 16 basis points (bps) and 14bps lower respectively than at the end of September. The Australian 10 year bond yield fell even more than its US counterpart falling by 21bps and finishing October at 3.28%.
On the economic data front, US indicators showed a second consecutive quarter of strong growth, 3.5% annualized GDP growth in Q3 after 4.6% in Q2; the strongest two-quarter growth in a decade. While the advance reading of Q3 GDP came out late in the month, the September non-farm payrolls report early in October was particularly strong too, showing a better-than-expected gain of 248,000 and the unemployment rate falling to 5.9%; the lowest since before the onset of the global financial crisis in 2008. Economic readings in China were on balance a touch firmer than expected with Q3 GDP coming in at 7.3% y-o-y and stronger growth in exports and industrial production in September. In Europe, economic readings remained mostly quite soft. In Australia, monthly economic readings were mixed with strong August home building approvals – up 3.0% m-o-m – but soft retail sales – up 0.1% and comparatively weak September employment at -29,700 – although, the number is suspect with the Statistician turning off the seasonal adjustment factor because of clear errors. Q3 inflation stayed low with the headline CPI up 0.5% q-o-q, 2.3% y-o-y helping to confirm that the RBA is likely to keep the cash rate unchanged for some time to come.
Looking ahead, economic growth still looks set to improve further late in 2014 and early in 2015. Growth in China and Europe look like needing assistance from easier policy settings which will probably be forthcoming. In Australia, the headwind to growth from weak growth in national income together with signs that annual inflation should continue to edge lower, imply that the RBA is very firmly on monetary policy hold. Low interest rates should help to foster greater household spending, but the precise timing of the improvement is tricky. It may be some time before the RBA feels confident enough to start reversing very easy monetary policy, although the declining Australian dollar means that the first rate hike may not be quite as far away as we earlier thought likely. We still expect the next rate move, when it comes, to be a hike, but it looks at this stage that the move could be some time in the second half of 2015.