Licensee Economic Update – April 2014
March 2014 proved to be a relatively benign month for portfolios as conflicting market outcomes neutralised diversification. In particular we evidenced an unexpected strengthening of the A$ which impacted negatively on unhedged international allocation. We also saw the United States unemployment rate flat rather than falling, which resulted in volatility with the United States share market. The nervousness was palpable with losses then a recovery over a few days. Conversely we experienced better than anticipated unemployment figures here in Australia and a surprise positive return in emerging markets. Readers will recall how unpopular Emerging Markets have been with most fund managers the past 6 months and if anything, this is a timely reminder that diversification often outplays economic forecasting and predictions.
There was also some weakness in equity markets in the first half of March, reflecting concerns about developments in the Ukraine. Russia’s annexation of Crimea after a referendum of dubious validity and partial sanctions from the West against Russian interests initially eased the market’s concerns but they have resurfaced in early April.
In Australia, the Reserve Bank left the cash rate unchanged at 2.5%. Diminishing expectations of any further reductions in the cash rate and this was a factor supporting the bounce in the Australian dollar to back over US$ 0.92. At time of print this has increased above US$0.93.
Figure 1: The $A bounced back in March and Emerging Markets contributed positively
In the world of statistics here in Australia, the Reserve Bank Board left the cash rate unchanged at 2.5% at its meeting in early April. This will be an ongoing challenge with fast rising residential property prices, particularly in the Eastern States. If anything, the outlook is trending toward a rise which would traditionally spell problems for the A$ in that it would strengthen further and hurt exports yet again.
Retail sales rose a seasonally adjusted 0.2% in February after a very strong 1.2% increase in January. The latest national accounts statistics also showed the economy grew by 0.8% in the December quarter 2013 and by 2.8% in 2013 as a whole. Although a reasonable result, this is still below the longer run trend pace of growth. Business investment fell 3.5% in the December quarter while consumer spending rose 0.8% and dwelling investment was up 1.0%. Net export growth was better than expected in the December quarter.
As outlined in the opening summary, the latest employment data showed a further 47,300 jobs were added in February with the unemployment rate holding steady at 6.0%. However, it is still generally expected that the unemployment rate will rise further in coming months. The Australian Bureau of Statistics warned that the latest employment numbers may be artificially boosted by statistical effects.
In a sign that activity in the housing sector continues to expand, residential building approvals rose a further 6.8% in January. Overall, the latest data support the view that economic growth is gradually shifting from the mining sector to other parts of the economy. Given the robust response of the housing market it is not surprising that the Reserve Bank is happy to leave the cash rate where it is.
Figure 2: Dwelling investment is picking up sharply
In the United States some of the economic news was bit softer than expected due to ongoing weather effects – it has been an extraordinary year in the United States with the horrendous weather conditions and we will no doubt reflect on its impact on the economy in years to come:
- retail sales rose a modest 0.3% in February;
- there were some further declines in unemployment claims suggesting that the labour market continues to gradually improve;
- the NAHB housing market index rose only slightly in March to 47 after a sizeable drop in February;
- the consumer price index rose 0.1% in February;
- new home sales fell 3.3% in February;
- consumer confidence in March was a little better than expected and much the same as in February;
- non-farm payroll employment rose by 192,000 in March which was a little less than 200,000 expected by economists; the unemployment rate was steady at 6.7%
In its regular regional assessment of the economy, the Federal Reserve said that most parts of the economy continue to grow despite disruptions caused by poor weather. Three quarters of the Federal regional districts reported improved levels of activity. The report also noted that inflationary pressures were “largely unchanged”.
The new Chairman of the Federal Reserve, Janet Yellen, raised some eyebrows in the markets when she suggested that the Reserve might start to lift interest rates as soon as six months after the Taper is completed. This was more hawkish than the comments from the Federal Open Market Committee suggesting that interest rates would remain at current levels for an extended period of time and that the Reserve would look at a broader range of indicators to assess when interest rates should start to rise.
The Reserve also released the results of its latest stress test on big US banks. The report said that all but one of the 30 institutions tested have sufficient capital to withstand a severely adverse economic scenario – this is a very encouraging risk management outlook.
In Europe both the European Central Bank and the Bank of England have left their monetary policy settings unchanged. However, the ECB has indicated that it will be ready to provide further monetary stimulus if required. The markets are still concerned that Europe is at risk of falling into a deflationary trap and that the ECB is being too slow to respond to this. Speculation persists that the ECB will have to undertake a quantitative easing programme along the lines of those seen elsewhere in the world. The Euro has remained persistently strong and is seen to be a drag on growth and a cause of declining inflation. Further monetary stimulus to weaken the Euro would be a positive for the Euro zone.
In China, latest trade and manufacturing data added to the markets’ concerns about a slowdown in economic growth. Although recent data have been distorted by the Chinese New Year holidays, market participants have been speculating that the government will have to announce new measures to stimulate the economy. The authorities had been emphasising their 7.5% growth target along with the importance of reducing pollution and getting the shadow banking system under control. In recent days, the authorities announced a package of measures to help stabilise growth including a reduction in the tax burden on small enterprises, accelerating construction spending on railways and additional low-income housing.
General elections began in India in a process which will run until 12 May. The opposition leader Narendra Modi is expected to become the new Prime Minister, which is generally
seen as a positive move for the economy.
This has been prepared by Paragem Pty Ltd [AFSL 297276] and is intended to be a general overview of the subject matter. It is not intended to be comprehensive and should not be relied upon as such. We have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained above. Advice is required before any content can be applied at personal level. No responsibility is accepted by Paragem or its officers.