For a more comprehensive round up of the week, listen to Stephen’s full report here.
Risk Assets were mostly stronger in January, but a noticeable exception was the US equity market beset by the negative impact of much lower oil prices on US energy companies, as well as a run of softer-than-expected Q4 company earnings reports starting to reflect the damaging impact of the appreciating US dollar. Outside the US currency, weakness in many countries and a batch (of monetary policy easing announcements from several central banks of which the most notable was the substantial asset purchase announcement (QE) by the European Central Bank) all served to underpin share buying. Over the month, the US S&P 500 fell by 3.6% going against the grain of strong increases elsewhere ranging from a 1.3% rise for Japan’s Nikkei to a 9.1% rise for the German DAX. The ASX 200 rose by 3.3%, but like all equity markets, progress was bumpy through the month and volatility was high.
The Australian credit market was a little softer through the month, but exhibited noticeably less volatility than equity markets. In interest rate markets more generally, longer term bond yields fell sharply over the month responding to a more cautious view about global growth prospects, falling inflation mostly on lower energy prices and the batch of monetary policy easing moves – some surprise moves in the cases of Bank of Canada, Reserve Bank of India and Monetary Authority of Singapore. The move by the ECB announcing 60 billion euro of asset purchases a month, from March 2015 through September 2016, also helped to recalibrate interest rate expectations lower around the world. The US Federal Reserve (one of the very few central banks expected to lift rates in 2015) reiterated at its January meeting that it would be “patient” before hiking its funds rate. US 10 year and 30 year treasury yields finished January at 1.64% and 2.22%, both 53 basis points (bps) lower than at the end of December. The Australian 10 year bond yield also fell during the month by 29bps and finished January at 2.44%.
On the economic data front, US GDP growth slowed by more than the market expected in Q4 to 2.6% annualised growth, from 5.0% in Q3. Monthly US economic readings through the quarter were also mixed-strength. Despite very strong readings of consumer confidence and consumer sentiment, retail sales were disappointing, down by 0.9% in December, after a downwardly revised 0.1% lift in November. Durable goods orders, an indicator of business investment spending were also weak in November, -2.1%, and December, -3.4%. On the strong-side, housing indicators were mostly firmer through the quarter and employment growth was very strong. In November and December, non-farm payrolls rose in the combined two months taking the unemployment rate down to a seven-year low of 5.6%.
In China, signs appeared that growth might be stabilising. Q4 GDP growth was steady at 7.3% y-o-y and monthly industrial production and retail sales accelerated in December to respectively 7.9% y-o-y and 11.9% y-o-y. In Europe, economic readings were mixed but still indicated very soft growth and possible deflation pressure with the preliminary EU inflation reading at a record low -0.6% y-o-y.
In Australia, business and consumer sentiment readings remained very weak, but the monthly economic readings were mostly stronger than expected. Notably, November home building approvals which were up by 7.5% and December employment, which showed an unexpectedly strong gain for a second consecutive month – up by 37,400 – and, equally unexpectedly, the unemployment rate reduced to 6.1% in December, from 6.2% in November. Towards the end of January, the Q4 CPI was released, a touch lower than widely expected at 0.2% q-o-q and 1.7% y-o-y, compared with 0.5% q-o-q and 2.3% y-o-y in Q3. Underlying inflation readings were not quite so benign averaging 0.7% q-o-q and 2.3% y-o-y, but are likely to fall over coming quarters.
Looking ahead, the widely held view from late 2014 of expected improvement in global economic growth in 2015, is coming under downward revision, notably by official agencies such as the World Bank, IMF and OECD. Increasingly, the outlook for 2015 looks like a story in two parts, with downside risks to global growth through the first half of the year, but support for growth later, from lower energy prices and easier global monetary conditions. Inflation is very low and in some places, notably Europe, the risk of more persistent deflation cannot be ruled out. Those countries that can, will be working to competitively depreciate their currencies to obtain what share they can of constrained global growth.
In Australia, notwithstanding the stronger economic readings of the last month or two, growth prospects are soft as the sharpest part of the decline in mining investment spending sets in. Australia needs unusually strong household and non-mining business spending to generate even, long-term trend, economic growth; achieving this is likely to become progressively harder with stagnant or falling national income. The changes around the world over the past month highlight that a more rapid onset of more difficult economic conditions for Australia is likely. With local inflation set for a protracted stay at, or below, the RBA’s target band, we see the RBA cutting the 2.50% cash rate very soon.