US and Asia lead a strong start to 2018

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Monthly economic commentary - January 2018

Led by the US and Asian region, world markets saw the best start to a year for the S&P 500 index since 1987. While we roared into the New Year, volatility unexpectedly crept back into markets late in the month.

Stocks were boosted by news of strong economic growth. Early in the month, the forward-looking Purchasing Managers’ Index (PMI) figures indicated healthy growth. The IHS Markit US Manufacturing PMI came in at 55.5 in January, compared to 55.1 in December (a figure above 50 shows expansion). The Composite PMI (which includes services) was 53.8, down from 54.1 in December, but the 23rd consecutive month above 50.

China’s PMI was weaker than expected, as factory activity cooled. The National Bureau of Statistics' official Purchasing Managers' Index (PMI) declined from 51.6 to 51.3, an eight-month low, but still above the 50-point level that divides growth from contraction. However, the non-manufacturing side of the Chinese economy appears to be holding up, expanding for a third consecutive month on the back of a pick-up in service sector growth. The private Caixin/Markit manufacturing Purchasing Managers' Index for January came in at 51.5, beating expectations of 51.3, as factory output in the small and mid-size manufacturing sector hit a 13-month high.

The Eurozone composite PMI hit a reading of 58.6 points, the highest since June 2006, well before the global financial crisis, according to data firm IHS Markit. The December quarter saw the strongest factory output increase in Europe since 2000.

Japan's manufacturing sector's strong momentum carried through into 2018, growing at its fastest pace in almost four years in January. The Nikkei-Markit Japan manufacturing PMI rose to 54.8 in January from 54.0 in December, as new order growth rose for a third consecutive month. South Korea’s manufacturing PMI returned to expansion in January, while in Australia, the Ai Group’s PMI came in at 58.7 points in January, up 2.5 points from the level reported in December.

In terms of economic growth, US economy expanded at a 2.6% annual rate in the fourth quarter of 2017, to grow 2.3% for the year, up from the 1.5% growth in 2016. The Eurozone economy ended 2017 with the strongest growth in almost seven years, with gross domestic product (GDP) rising by 0.8% for the December quarter, to make 2.5% annual growth.

In China, the final official GDP growth figure for 2017 was 6.9%, which beat Beijing’s target of 6.5%. Japan’s factory output grew by 1.8% in the December quarter, rising for a seventh straight quarter.

Growth forecasts for 2018 saw significant boosts. The International Monetary Fund (IMF) said the global economy should grow by 3.9% in 2018 and 2019, up from the 3.7% a year growth rate it forecast in October. Half the upgrade was due to the $US1.5 trillion ($A1.9 trillion) in tax cuts enacted by the US Congress in December.

Markets reacted enthusiastically to the improving outlook. The Dow Jones Industrial Average was up 5.8% in January, while the S&P 500 Index gained 5.7% and the technology-heavy Nasdaq Composite Index surged 7.4%. In Europe, the Euro Stoxx 600 index was up 1.7%, with the DAX in Germany up 2.1% and the CAC 40 in France 3.2% higher. London’s FT 100 index went against the trend, shedding 2%.

In Asia, Japan’s Nikkei index added 1.5%, and the Hang Seng Index in Hong Kong powered to a 9.9% gain – its biggest monthly jump since April 2015 – while the Hang Seng China Enterprises index, which tracks the performance of mainland stocks listed in Hong Kong, climbed 16%. On the mainland, the Shanghai Composite Index gained 5.2%. South Korea’s KOSPI index added 4%. In Australia, the S&P/ASX 200 index eased 0.4%, although its Resources sub-index managed a 0.8% gain.

On fixed-interest markets, US and European yields rose substantially as bonds were sold off on anticipation of the end of stimulus from major central banks. The yield on the key 10-year US Treasury bond hit a four-year high at 2.75%, before closing the month 30 basis points (bps) higher at 2.71%. The US two-year yield rose by 26 bps to 2.14%, while the 30-year yield added 20 bps to 2.94%.

In Europe, German 10-year yields climbed 27 bps to 0.69%, while the German 5-year yield turned positive – to the tune of 0.002% – for the first time since December 2015. The French 10-year yield gained 19 bps to 0.97%, while its UK counterpart increased by 32 bps to 1.51%. The Japanese 10-year yield reached a seven-month high of 0.095% toward the end of January.

On the commodities markets, Brent crude oil gained 3.3% and West Texas Intermediate (WTI) rose by 7.1% in January, in oil’s strongest start to a year in five years. Gold appreciated by 3.3% in US dollar terms, while iron ore added 2.2% to $US72.35 a tonne. The Bloomberg Commodity Index was 1.9% higher for the month.

The Australian dollar gained 3.2% to finish the month at 80.5 cents, against the greenback, which also lost ground against the euro, the yen and the pound.

Information current as at 31 January 2018. This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. Past performance is not a reliable indicator of future performance. This article may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material.

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