Risk assets, including credit, were markedly stronger through April although the trajectory was quite volatile with mixed strength economic readings in the US and Australia, but a softer tone to Asian and European economic readings. During the month, the market’s earlier view of global economic growth gathering pace through 2013 started to erode, a process reinforced by a much weaker than expected lift in March US non-farm payrolls, initially reported up only 88,000 (although revised upwards to 138,000 in the latest payrolls report) and a softer than expected Q1 Chinese GDP reading, albeit still up 7.7% y-o-y. Rather than hurting risk asset sentiment, the softer economic numbers proved to be a spur as they also implied that the major central banks could keep policy on an easier bias for longer. In the case of the Bank of Japan (BoJ), the easing policy move by new Governor Kuroda was more dramatic than expected delivering a security buying program (quantitative easing) relative to Japan’s GDP three times the size of the US Fed’s easing program.
The BoJ’s April policy boost lifted Japanese sharemarket sentiment and the Nikkei rose by 11.8% in April, after a 7.3% lift in March. In the US, the Fed made it clearer that its quantitative easing program could continue and expectations started to build in the market that the European Central Bank was in a position to cut its benchmark rate too (the rate was cut early in May by 25bp to 0.50%). Expected and actual easing by central banks helped all major share and credit markets to rally through April, albeit not to the same extent as in Japan. Apart from Japan, other standout increases in sharemarkets were the European Euro Stoxx up by 3.3% and the Australian ASX 200, up by 4.5% where a chase for yield more than offset doubts about prospects for major resource company shares.
In Australia, economic indicators were very mixed. Early in the month February retail sales and home building approvals were particularly strong, up by respectively 1.3% and 3.0%. A perception that economic growth might be accelerating, notwithstanding the imminent pullback in resource sector investment spending, was tempered quickly by a bigger than expected 36,100 fall in employment in March with the unemployment rate also lifting more than expected to 5.6%. Surveys of business, consumer and manufacturing activity released during the month were also all weaker. Towards the end of the month, the Q1 CPI release showed headline and underlying inflation softer than expected. The headline CPI rose by 0.4% q-o-q with an annual reading of 2.5% y-o-y, comfortably in the middle of the RBA’s 2-3% target range.
At its early April policy meeting the RBA left its cash rate unchanged at 3.00%, but in the accompanying statement reiterated that low inflation left it with the capacity to lower the cash rate further if needed to assist demand. We expect the early May policy meeting to deliver an identical result – no rate cut, but the capacity to cut rates in need. The most interest rate sensitive part of the economy has, housing purchase, has been improving since late February. The auction clearance rate in Australia’s biggest housing market, Sydney, lifted to 78.1% the first weekend in May, the highest reading since early 2010 and just below the 2002-03 boom levels. Home buying activity does not appear to need a further rate cut and our view remains that the cash rate will be on hold at 3.00% for the remainder of 2013. However, the RBA is likely to retain its easing bias wording for several more months in our view, helping to retain a bid tone for risk assets, including credit.