For a more comprehensive round up of the week, listen to Stephen’s full report here.
Risk assets were mostly mixed in March amid uncertainty about the strength of global economic growth and concern about flaring tension between Russia and the Ukraine. US economic indicators for February and March were consistent with a moderate recovery after the disruption from severe winter weather. However, the growth pullback in the world’s second biggest economy, China, around its New Year celebrations appeared more pronounced than usual, raising issues of the cost to near-term growth prospects from the reform efforts of the authorities on many fronts. Major equity markets were mixed in March ranging from a 3.1% fall for the British FTSE 100 to a 0.7% gain for the US S&P 500. The Australian ASX 200 ended down by 0.1% with resource stocks weighing on mostly softer than expected economic news from China.
Credit markets finished March little changed from where they ended February, but after undulating through the month mostly in tandem with the fortunes of equity markets. Major bond markets were a little weaker through March, but remain resilient in the face of the US Federal Reserve continuing to wind back its asset purchase programme or quantitative easing. The Reserve Bank of Australia also made it clearer in various comments from senior officials that the next local cash rate move, when it eventually comes, is likely to be a hike, not a cut. US 10 year and 30 year treasury yields finished March at respectively 2.76% and 3.61%, 11 basis points (bp) and 3bp higher respectively than at the end of February. The Australian 10 year bond yield rose by 7bp, finishing March at 4.09%.
On the economic data front, US indicators were mixed, but most were consistent with soft recovery from the damaging impact of the severe winter weather. February durable goods orders were particularly encouraging, jumping by 2.2% in the month. Importantly, US employment is improving too, notably in the private sector. The latest March nonfarm payrolls lifted by 192,000 with private sector positions up by 215,000. Economic readings in China released through March were almost all softer than expected raising issues about whether the authorities can achieve their 7.5% GDP growth target in 2014. European economic readings, in contrast, were mostly a little firmer than expected and consistent with a continuing, modest economic recovery. In Australia, economic readings were mostly surprisingly strong, noticeably so for January retail sales, up 1.2%, January and February international trade data with surpluses well above $A1 billion each month, and February employment, up 47,300.
Looking ahead, global economic growth still looks set to accelerate. US households and businesses are increasingly well-positioned to spend more freely. In China, the authorities have ample policy leeway to combat the near-term costs associated with economic reforms. European economic recovery is slowly gaining traction. In Australia, households are starting to spend more freely and it is still likely to be several months before the RBA lifts the cash rate, on an increasingly protracted hold at 2.50%. Our view remains that rising annual inflation will eventually push the RBA to hike the cash rate, but that is unlikely to occur until August, after the Q2 2014 CPI release in late July.