Economic Update – March 2018
Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.
– United States (US) jobs data starts a correction
– Market rally hard on no news!
– Australia jobs data are mixed
We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.
The Big Picture
We ended January on a slight sell-off, arguably because markets ran a little bit too hard at the start of the year. But come February 3rd there was one little number in the US jobs report that caused a stir.
Wage inflation came in at 2.9% – not big in itself, but a little higher than expected. That caused market participants to reprice bond yields and equities dived a little more.
A week later, all was forgiven. When the noise was stripped out of the data, markets rallied hard again. But then they sold off in the last couple of days of the month.
The US got a second bite at the inflation cherry with the mid-February CPI read. Both versions of the index beat by a fraction so market volatility started to fluctuate in normal territory.
We had the local ASX 200 minimally overpriced in January, so it was no surprise that our market didn’t fall as far as Wall Street. And it rebounded sharply!
Our labour force data seemed strong on face value. But full-time jobs growth plummeted, while part-time more than took up the slack. Unemployment is stuck in the mid 5% range.
China produced some stunning trade data. The commodity boom is far from over.
China is also moving to ‘do a Putin’ by removing the restrictions on a president serving for an extended period. President Xi looks set to be around for at least another 5 – 10 years. Not bad for now but how will the next generation be introduced? Of course Australia and the UK have no limits on the tenure of a PM.
Stock market volatility certainly spiked in early February but it has already got back to close to the normal zone.
The fly-in-the-ointment for the next month is how the new US Fed Chairman, Jay Powell, handles himself. He faced his first grilling on Capitol Hill at the end of February. Commonsense dictates he will try to help the market slowly adjust to any new scenario he would like to preside over.
He was quite upbeat on the strength of the US economy. He emphasised that this strength has improved since the December Fed meeting.
The market and the Fed were both pricing in three rate hikes for 2018. But that Powell testimony has pushed up the probability of four rates to 34%.
As new data has come to hand – particularly on inflation – volatility may again spike. But it is our view that, at the end of the year, 2018 will be seen as having been good for equity markets.
Our Reserve Bank seems unlikely to do much for months – if not for the whole year and beyond.
It so happens that many high-profile analysts have called the latest US company reporting season (February) as “excellent” and the Australian season that is just ending as “quite good”.
With global growth converging to a stronger world economy, and US and Australian companies predicting a brighter future, 2018 looks likely to be quite a strong year for investors.
Our market was almost flat over the month but the Healthcare sector was particularly strong with CSL leading the way. The market finished February at 6,016 – which is well off the February low of 5,821.
We have the index priced fairly with above average capital gains expectations going forward.
The S&P 500 index sold off at the end of the month to finish down by ‑3.9% which is about the same as for other major indexes. Australia was the standout!
Bonds and Interest Rates
The RBA did not change rates at the February meeting. It is doubtful that they will raise rates in 2018 and they might even cut.
The US Fed and the market seemed in lockstep at the beginning of February expecting three hikes in 2018. But Jay Powell’s first appearance on Capitol Hill was read as being quite bullish on the economy. The odds of four hikes rose to 34% on this testimony.
This change in sentiment nudged the 10 year US Treasury bond rate to almost 3% – the highest in 4 years.
The price of iron ore had a particularly strong month. Oil, gold and copper prices were all down a fraction in February.
16,000 new jobs were created in January – the latest published data point – but full-time jobs fell by ‑49,800 and part-time increased by 65,900. The unemployment rate came in at 5.5%.
China had another spurt in trade volumes. Imports were up 36.8% and exports were up 10.5%. However the China manufacturing PMI missed expectations at 50.3 from 51.3 the month before. The non-manufacturing PMI was also weaker than expected at 54.4 from 55.3 but it was still very much higher than the value of 50 that divides contraction from expansion. Some experts said that the Lunar New Year celebrations may have adversely affected the data.
The authorities are moving to remove the current limits on the tenure of the President. As a result, President Xi looks set to steer the ship for at least another 5 – 10 years.
On the short-run, an extension for Xi is a positive but the danger is that a lack of new blood in his inner sanctum may make the eventual transition to a new President less smooth.
The US started February with a strong jobs report. 200,000 new jobs were created and unemployment was 4.1%. The wage rate grew by 2.9% which caused a change in expectations to a faster rise in interest rates.
Fourth quarter GDP growth was revised down to 2.5% from 2.6%.
Importantly, the wage data contained a significant change to the minimum wage that might only have given a temporary boost to wage inflation.
The US CPI data produced a headline figure of 2.1% and a ‘core’ rate of 1.8%. It is the latter that is favoured by the Fed and its target rate is 2%.
Bloomberg TV reported that Trump has already decided to run for re-election in 2021.
German inflation slipped in February but not by enough to cause concern.
Brexit negotiations continue to attract attention but again progress is being made but not rapidly enough for many members of parliament across party lines.
Rest of the World
The Winter Olympics concluded in South Korea with apparent harmony between north and south. But the star of the Olympics must be the woman – born and raised in the US – who represented Hungary by virtue of her grandparents. She came last in her event as she did not perform any tricks on her skis that characterise the sport. She qualified by coming in the top 30 in the required number of world cup events. She managed that feat by only entering competitions with less than 30 entrants and coming last in each!
It was reported on Bloomberg TV that the North Korean president, Kim Jong-un, and his father used false Brazilian passports to travel in the 1990’s.