Market Update: April 2018
- The DOW ended at 24,103 in March down from 24,719 in December with a new all-time high of 26,616 reached at the end of January before the market volatility that had been lacking over the previous year returned, resulting in regular outsized movements in the DOWs value over February and March.
- ASX all ords fell from 6167 at end of December to 5869 at the end of March with a return of volatility and the looming threat of a global trade war negatively impacting Australian market.
- NAB’s business survey for March was positive overall, with conditions remaining well above average, however, this was a noticeable fall in confidence compared to previous levels largely due to a fall in sales, profitability and employment conditions.
- The RBA looks unlikely to raise interest rates in the near-term future, with analyst opinions varying between a rate rise in November 2018 or not until May 2019 or longer. However as overseas funding costs for domestic banks begin to rise, led by expected increases in the US Federal reserve rate, this may result in more out of cycle rate rises.
- Australian GDP grew by 0.4% in the December quarter resulting in an annual GDP growth rate of 2.4%, lower than market expectations led by a decline in construction activities and net trade that was unable to offset an increase in household consumption.
- The economy added 33,500 jobs in January and February, although the unemployment rate increased to 5.6% in February led by a slight increase in the participation rate up to 65.7%.
- Commodity prices decreased overall during the quarter, with falls in the spot price of aluminium, zinc, copper and iron ore leading the way.
The business condition index had an overall increase up to a strong +15 points from the +14 at the end of the December quarter. It is important to note that the index peaked at +20 in February but is still currently well above the long-term average of +5. The employment index experienced a similar trend with a significant increase in February undone in March to bring the index to slightly above December’s levels and still consistent with a solid rate of job creation.
Australia’s retail sales rose 0.6% in February rebounding from previous lows in January and December to help bring annual growth rate up to 2.6%.
Sydney dwelling values have continued to fall, with a drop of -1.7% over the first quarter of 2018, bringing the total return to -2.1% over the last year.
Melbourne also experienced a slight drop in dwelling values with a decrease of -0.5% over the March quarter bringing the annual return to 5.3%.
Dwelling values were flat in Brisbane over the three months to March 2018, resulting in an annual return of 1.3%.
Adelaide experienced a decline of -0.4% over the March quarter, resulting in an annual return of 1.7%
Perth dwelling values decreased by -0.2% over the three months to March 2018 bringing the total annual return to -2.4%.
Hobart has experienced the strongest growth in dwelling values of the capital cities, with a quarterly return of 3.4% for the March quarter and an annual return of 13%.
Quarterly change in dwelling values (Dec’17 Quarter)
The major news from the US over the quarter was Trump’s decision to investigate applying tariffs to Chinese imports and China’s retaliatory decision to do the same sparking concerns for a trade war between the worlds two largest economies. It should be noted that at present these are announcements of intentions and no tariffs have yet been implemented.
Whilst the market is nervous over the potential for a trade war to spiral out of control the underlying US economy is performing extremely well, with the December GDP growth rate revised upwards to 2.9% (from 2.5%) above original expectations. Furthermore, the US unemployment rate remained at 4.1%, being the lowest level since December 2000, with the average hourly earnings increasing to 2.7% p.a.
On the back of the strengthening economy and the steady increase in wages confirming their belief that inflation would increase to the targeted 2% p.a. the US Federal Reserve lifted the official interest rate to 1.75% in March. The Fed currently expects to increase rates at least 2 more times this calendar year.
The Eurozone has continued to expand with a GDP increase of 0.6% over the December Quarter, bringing the annual GDP growth rate up to 2.7%. Despite a large amount of uncertainty surrounding both internal politics, in particular in Italy and Central Europe, and the future trading relationship with Britain after Brexit, analysts are forecasting continued strong growth of 2.4% in 2018 from the Eurozone area. This is supported by strong expected growth in Spain, Germany and France.
Inflation from 1.3% in January to 1.1% in February with overall price pressures remaining weak, although this is partly due to a strong euro. Overall inflation still remains well below the European Central Banks target of 2% and there has been no change over the last quarter in the ECBs interest rate, with it remaining at 0%. The ECB is still conducting its asset purchasing program (Quantitative Easing) with this expected to end in September however, the Bank reiterated that this could be extended if deemed necessary.
The Chinese economy continued it’s strong growth trajectory with year on year GDP growth of 6.8% reported for the March Quarter, above the government’s target of 6.5% and defying expectations of a downturn after strong growth in 2017.
The outlook for China is mixed with some analysts expecting a tighter fiscal policy and slower credit creation will weigh on broader activity by year end, whereas others see a rise in the official factory Purchasing Manager Index up to 51.5 in March as a sign that the Chinese economy is carrying more momentum from last year than expected which will continue to support both Chinese and global growth.
As with the US economy, the recent trade tensions is clouding the outlook, whilst the current proposed tariffs are expected to have a relatively small impact the potential for these to escalate could have a major impact on the Chinese economy going forward.
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