For a more comprehensive round up of the week, listen to Stephen’s full report here.
Risk assets were weaker in January, in part a correction after very strong gains in 2013, but also reflecting doubts about the global economic growth outlook as the US Federal Reserve (Fed) continued to taper its monthly asset buying program, a softer edge in China’s economic data and economic risks from capital flight in a number of key emerging market countries including Argentina, India and Turkey. Market concerns were persistent despite signs of consolidating economic recovery in the United States and the European Economic Union. Major equity markets in the United States, Europe and Asia fell sharply in January with the falls ranging from 2.6% for the German DAX index to 8.4% for Japan’s Nikkei. The Australian equity market was weaker too, notably the mining sector where any benefit from the softer Australian dollar was offset by concerns about less robust economic growth in China. The ASX 200 index fell by 3.0% in the month.
Credit markets followed equity markets lower through January, although the losses were less pronounced. Most major government bond markets, in contrast strengthened over the month, with safe-haven buying more than offsetting any concern about the US Fed cutting its asset purchase program at its late January policy meeting by another $US10 billion to $US65 billion a month. US 10 year and 30 year treasury yields finished January at respectively 2.64% and 3.60%, 39 basis points (bp) and 37bp lower than at the end of December. The Australian 10 year bond yield fell by 24bp, finishing January at 3.99%. Australian bonds rallied despite unexpectedly high Q4 CPI and underlying inflation readings all but removing any likelihood of the RBA cutting the cash rate any further.
On the economic data front, US indicators were mixed strength for the months of November and December, but consistent with a consolidating economic recovery. The advance reading of US Q4 GDP growth on an annualised basis came in at 3.2% a touch higher than 3.0% market expectation, but lower than 4.1% on final revision for Q3 2013. Economic readings in China released through January showed mostly minor deceleration in December readings of industrial production, retail sales and urban fixed asset investment and GDP growth back a touch in Q4 to 7.7% y-o-y from 7.8% in Q3. European readings, in contrast, were mostly firmer than expected. In Australia indicators of housing activity, retail sales and exports were strong while December employment was disappointing falling by 22,600, although the unemployment rate was steady at 5.8%.
Looking ahead, economic growth in the big advanced economies looks set to improve in 2014. US growth faces less of a headwind from government spending cuts and although the Fed may continue reducing its monthly purchases of bonds and it is unlikely to start lifting interest rates this year. In the developing world, China’s annual economic growth looks set to consolidate at a respectable 7.5% y-o-y and problems elsewhere in the developing world are likely to fade assisted by improving international trade and currency realignments. Economic growth is likely to accelerate in Australia, partly a lagged impact from low interest rates and assisted by a weaker currency. Inflation may potentially be a problem earlier than previously expected, reinforcing our view that the next RBA rate move is likely to be a 25bp hike, probably in August, after the Q2 2014 CPI release.