Investors remained cautious in September as markets felt the headwinds of rising bond yields, global trade uncertainty and growing debt concerns in Italy.
Mixed news for Australia
Data released in September showed Australia’s economy grew at a strong annual rate of 3.4% to the end of June. The result was a step up from the 3.1% rise in GDP recorded at the end of March, after the economy grew 0.9% in the June quarter, beating market forecasts.
As expected, the Reserve Bank of Australia (RBA) left the official cash rate unchanged at 1.50% in September, with dialogue from the meeting expressing the RBA’s current view that ‘progress on unemployment and inflation was likely to be gradual’ and ‘there was no strong case for a near-term adjustment in monetary policy’.
Local employment data revealed a 44,000 job rise over the month of August, driven by increases in full-time jobs (+33,700) and supported by growing part-time jobs (+10,300). Despite the rise in jobs, the unemployment rate held steady at 5.3% due to a lift in the participation rate from 65.6% to 65.7%.
The Westpac Melbourne Institute Index of Consumer Sentiment declined from 103.6 in August to 100.5 in September. While the index is still in positive territory, the September reading is the weakest since November last year having been impacted by a range of factors including increases in mortgage rates and political instability.
After a string of positive months, the Australian share market was broadly down in September with the S&P/ASX200 Accumulation Index losing 1.3% over the month. Other major indices were mostly down, with the S&P/ASX 200 Accumulation Industrials Index (-2.8%), the S&P/ASX 200 AREIT Accumulation Index (-1.8%) and the S&P/ASX Small Ords Accumulation Index (-0.4%) all losing ground. After a poor August, the S&P/ASX 200 Accumulation Resources Index rebounded, achieving a strong return of 5.4%.
US markets lift against a backdrop of building concerns
In a move widely expected by the market, the US Federal Reserve decided to increase US interest rates by 25 basis points in their September meeting. The move takes their target range to 2.00% - 2.25%, with the Fed stating that since meeting in August their ‘labour market has continued to strengthen and economic activity has been rising at a strong rate’. The rate hike is the Fed’s third in 2018 as attention now turns to the outcome of their December meeting.
The trade war between the US and China continued to deepen in September, with fresh talks between the two countries proving to be unsuccessful as President Trump implemented US tariffs of 10% on US$200 billion worth of Chinese goods. In turn, China retaliated commenting they had no choice but to respond with tariffs of their own, announcing tariffs of 5-10% on US$60 billion worth of US goods.
In contrast, a new trade deal between the US, Mexico and Canada was struck to replace the previous North American Free Trade Agreement (NAFTA). The new agreement named the US-Mexico-Canada Agreement (USMCA) will govern more than US$1 trillion in annual trade but must first pass through US Congress.
The US S&P 500 Index and Dow Jones Index both continued their strong runs, rising 0.6% and 2.0% on a total return basis respectively.
Asia continues to seek positive momentum
The Bank of Japan (BOJ) held monetary policy steady in its September meeting. The decision was made by a 7-2 board vote, with the BOJ maintaining its short term interest rate target at -0.1% and its 10-year government bond yield target at around 0.0%. The BOJ stated that ‘Japan’s economy is expanding moderately’ but Governor Mr. Kuroda again stated that it would keep interest rates extremely low for an extended period due to Japan’s stubbornly low inflation and sluggish wage growth.
Inflation figures for Japan were released in September, with the Consumer Price Index (CPI) rising 0.9% in the year to August. This was up from a 0.8% rise in July, however, inflation still remains distant from the BOJ target rate of 2.0%.
In China, the official manufacturing Purchasing Manager’s Index (PMI) dipped below market expectations, falling from 51.3 in August to 50.8 in September. Data released also showed inflation in China climbing, with annual CPI rising to 2.3% to the end of August. The result was up from the 2.1% July figure, with experts seeing further room for inflation due the fallout from the US-China trade war.
Japan’s Nikkei 225 Index (+6.2% on a total return basis) and the Shanghai Composite (+3.5%) both had a strong months, while the Hang Seng fell 0.4% on a total return basis.
European markets mixed
Euro area annual inflation rose to 2.1% in September, up from 2.0% in August. However, the increase was mostly attributable to higher energy prices, with the core measure of inflation which excludes energy, food, alcohol and tobacco only printing 0.9%.
The European Central Bank (ECB) left monetary policy unchanged in September, reconfirming that it expects interest rates in the Eurozone to stay at their present levels ‘at least through the summer of 2019’. President Draghi of the ECB Governing Council also confirmed that the ECB would be reducing its monthly bond purchases from €30 billion to €15 billion from October until the end of the year as the Council slows its quantitative easing program.
In the UK, the Bank of England left interest rates unchanged at 0.75% following a decision to raise rates in its previous meeting. With uncertainty still surrounding the UK’s withdrawal from the European Union, the market widely expects that another rate increase is unlikely to occur before the planned date for Brexit in March 2019.
Throughout September concerns mounted over the budget deficit being run by the Italian government as they laid down their 2019 budget. The government set next year’s budget deficit target at 2.4% of GDP, which despite remaining inside the 3.0% ceiling prescribed by EU rules, prompted concerns after Italy was previously expected to cut the deficit decisively to curb its rising debt.
European markets experienced mixed results in September with the STOXX Europe 600 Index gaining a modest 0.3% on a total return basis. This was led by the French CAC 40 Index (+1.6%) and UK FTSE 100 Index (+1.1%), while the German DAX (-1.0%) weighed.
A more detailed summary, including September market data, is also available.
Information current as at 30 September 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. 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.
This document has been created by Westpac Financial Services Limited (ABN 20 000 241 127, AFSL 233716). It provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This article is current as at 20 September 2018 and 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.
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, before acting on it.
Past performance is not a reliable indicator of future performance. © Westpac Financial Services Limited 2018