Licensee Economic Update – March 2014
Most markets were positive in February with local shares producing a very solid 4.97% for the month and international shares an equally encouraging 4.21%. Bonds and Real Estate also contributed to portfolios.
While all this was happening emerging markets were also on the rebound. What a difference a month makes in financial market sentiment. As noted in last month’s snapshot, the much aligned emerging markets were all doom and gloom but were expected to recover…..just not as soon according to the economists and fund managers – but in February this very event started to happen with sentiment improving as participants reassessed their sell down from previous months and began looking through the weather-distorted data from the United States.
As evidenced last month the US economic data continues to be distorted by unusually bad weather conditions and the underlying view remains that the US economy is recovering without inflationary pressure. Politicians voted to suspend the US debt ceiling until 2015, thereby removing an issue which provoked so much acrimony and uncertainty last year. This has a stabilising effect on markets.
The International Monetary Fund warned that the global recovery is still relatively weak with significant downside risks remaining.
The Reserve Bank of Australia decided to keep the cash rate unchanged at 2.5% at the Board Meeting on 4 March.
Figure 1: February saw volatility drop back sharply after spiking in January
Here in Australia the latest data showed employment fell by 3,700 jobs in January and that the unemployment rate rose to 6%. This is its highest level since July 2003. Toyota announced that it would be shutting down local manufacturing in 2017, following a similar announcement from Holden, while Qantas announced plans to cut 5,000 jobs. These examples highlight the pressures being faced by large companies in Australia and how this gets passed on to households.
Consistent with the bad news about employment and statements from the Federal Government about the need to tighten the budget, consumer sentiment fell 3% in February to its lowest reading since July last year. Extrapolating this further, expectations of unemployment rose in February.
Figure 2: Australian households are becoming more concerned about losing their jobs
The latest survey of business investment intentions showed weaker than expected spending planned for 2014/15. Although much of this reflects declines in capital spending in the mining sector, other parts of the economy were also reported as being relatively weak. On the other hand, the NAB Business Conditions Index rose a touch further in its latest reading to post the highest level in three years.
The Reserve Bank decided to leave the cash rate unchanged at 2.5% at its Board Meeting on 4 March. The Bank commented that economic conditions remained mixed and that unemployment will probably rise further before it improves. Nevertheless, the Bank feels that the current level of interest rates is appropriate for the immediate future.
A number of commentators have remarked that recent statements from the reserve bank suggest less concern about the $A than when it was sitting around parity with the US$. That is, the Reserve Bank seems to feel less need to talk down the currency now. Nevertheless, it is still generally expected that the $A is likely to fall further in coming months.
Economic data from the United States continues to be distorted by the exceptionally cold weather experienced in recent weeks. Some of the data released include:
- employment increased by 113,000 in January, which was significantly less than expected; nevertheless the unemployment rate fell to 6.6% which is its lowest level since October 2008;
- retail sales fell 0.4% in January;
- the CPI rose 0.1% in January and 1.6% in the year to January;
- Some regional PMI’s, including Philadelphia, Dallas and New York declined in February, as did housing starts and sales;
- real GDP grew 2.4% at an annualised rate in Q4 2013, which was about what had been expected.
The Federal Reserve said that it continues to watch the economy very closely in order to judge how much of the recent weakness in the data is due
to the weather and how much might be due to an emerging slowdown in the economy. For the moment, they are comfortable with continuing the Taper program, but will be flexible in response to economic conditions. Equity markets took this news in their stride, which is a sign that they are now more comfortable about the underlying strength of the US economy than when the Taper was first mentioned in mid-2013. Federal Reserve chairman Janet Yellen also repeated previous comments about the Reserve’s intention to hold interest rates at zero long after the unemployment rate falls to 6.5% – as long as inflation remains under control. Deliberations on the US debt ceiling resurfaced in February, but were resolved in a much quicker and cleaner fashion than seen last year. Around mid-February, politicians agreed to suspend the US debt ceiling until 2015.
News from Europe was dominated by developments in the Ukraine. As the political situation there became increasingly unstable and Russia indicated that it might intervene with military action, so financial markets became very nervous. The direct economic impact of the turmoil in the Ukraine is likely to be relatively low as Europe does not have major trade links with the country. However, the real potential risk is geopolitical tension infecting financial market sentiment. Latest reports suggest Russia may take a less hard-line stance thereby reducing the immediate risk of conflict. Nevertheless, this situation is likely to be a problem for a while longer.
In their latest reviews of monetary policy, both the European Central Bank and the Bank of England announced they would be leaving interest rates and other policy settings unchanged for the time being. This is despite the UK economy improving faster than authorities had expected. The Bank of England has revised up its forecasts of UK economic growth in 2014 to 3.4% from 2.8% previously. The ECB still sees downside risk to the European economy.
In Germany, business conditions improved in February, while in France they deteriorated further. The French economy is facing significant adjustments this year which will hurt growth. In Italy, new Prime Minister Matteo Renzi is taking steps to introduce some long-needed reforms to the Italian economy. If he is successful, this will be of significant benefit not just to Italy but to the European economy as a whole.
In Japan latest data showed some improvement in industrial production in January as well as a 4.4% increase in retail sales over the year to January. Unemployment remains at 3.7%. The Japanese authorities’ aggressive program to stimulate the economy and end the deflation era has been making progress but the Bank of Japan has indicated that it will continue to provide liquidity to the economy until it has achieved its objective of getting inflation up to 2%.
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