For a more comprehensive round up of the week, listen to Stephen’s full report here.
Risk assets showed a mixed performance in June partly reflecting variations in the economic outlook. During June, the US economy showed further signs of rebounding strongly from its severe winter-weather induced slowdown in Q1. The jury was still out on whether China’s growth moderation would continue, and sharply declining iron ore prices compounded concern about how well the Australian economy might rebalance from mining investment led growth. Growth in Europe also seemed to fade while, on the positive side, policy measures to boost growth in Japan seemed to be starting to gain traction. Major equity markets responded to the differences in economic performance and the US S&P 500 and Japan’s Nikkei both rose strongly by 1.9% and 3.6% respectively in the month. European markets, however, were weaker and the German DAX and British FTSE 100 fell by 1.1% and 1.5% respectively. The Australian equity market was weakest of the majors in June and the ASX 200 fell by 1.8%.
Credit markets mostly rallied through June, despite the softness in the Australian sharemarket. Persistently low interest rates remain a major factor allowing credit spreads to continue to compress. In the US, the Federal Reserve continued to wind back its asset purchase programme or quantitative easing at its June policy meeting by another $US10 billion to $US35 billion marking the fifth consecutive reduction in purchases. The Fed, however, continues to indicate that its funds rate will stay at zero until at least 2015. The Reserve Bank of Australia again left the cash rate on hold at 2.50% at its early June policy meeting and continues to advise an extended period of rate stability ahead. US 10 year and 30 year treasury yields finished May at 2.52% and 3.35% respectively, 4 basis points (bp) and 2bp higher respectively than at the end of May. The Australian 10 year bond yield, in contrast to the US bond market, continued to rally, falling by 11bp and finishing June at 3.54%.
On the economic data front, US indicators continued to show both the damage to past output from severe winter weather but also promising signs of a rebound. The final revision of Q1 GDP showed sharp contraction, -2.9% annualized growth from +2.6% in Q4 2013. Indications of US housing and manufacturing activity continued to improve in May, but most encouraging was the strengthening of the US labour market. Non-farm payrolls lifted a stronger than expected 288,000 in June, the fifth consecutive 200,000+ gain and taking the unemployment rate down to 6.1%; its lowest reading since the onset of the global financial crisis in 2008. Economic readings in China released through June pointed to a strengthening economy, notably stronger May export and retail sales readings. Forward looking PMI indicators of manufacturing and services were both noticeably stronger in June. In Europe, economic readings were soft enough to cause the ECB to ease monetary policy at its June policy meeting including reducing its deposit rate to -0.1%. In Australia, economic readings were mostly softer than expected, including a 4,800 fall in employment in May, although the unemployment rate remained steady at 5.8%.
Looking ahead, economic growth still looks set to improve through the northern summer months in the US, China and Europe and assisted possibly by further easing of monetary policy in Europe. In Australia, the headwind to growth from the Federal Budget announced in May together with signs of better contained inflation 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. The RBA is unlikely to move its cash rate before Q1 2015, when we expect a modest hiking cycle to begin.