Global markets recovered somewhat from the falls seen in late 2018.
Improved sentiment regarding trade, US Fed patience, Chinese stimulus and Brexit approach supported the markets, however global growth has remained subdued and geopolitical concerns remain.
Australian labour and inflation data was better than expected, but consumer sentiment reflects pessimism
The Australian labour market showed continued strength, with unemployment down to 5.0% in December, from 5.6% in December of 2017. However, the gain over the month was driven by part time job growth (+24.6k), while full time jobs fell (-3.0k).
December’s quarter headline CPI sat at 1.8% annualised, coming in just above expected, despite the fall in petrol prices, the slowing housing market and downward pressure on retail goods prices. Housing prices across capital cities continued to fall, with a decline of 1.2% in January (6.9% over the year to January). November owner-occupier loans fell 0.9% (-7.9% annualised) and the value of investor loans in November fell 4.5%. Building approvals fell 9.1% in November.
Consumer sentiment fell 4.7% to 99.6 in January, with a value below 100 reflecting pessimism. The NAB business survey reflecting business conditions and investment also fell from 10.6 to 2.2 in December, it’s lowest in four years. Private sector credit grew weakly by only 0.2% in December, which further suggests a poor growth outlook. In contrast, the AiG PMI rose from 50 to 52.5 in January, indicating the return to expansion.
The Australian Dollar gained over January, particularly in response to December labour data and fourth quarter CPI data. Further support came from positive sentiment surrounding US-China trade talks. The Australian Dollar particularly benefitted against most major currencies in the final week of the month due to the strong increase in iron ore prices, leading the AUD/USD to a two-month high of 0.73. This caused the Australian terms of trade to grow in the fourth quarter, as export prices grew by 4.4% while import prices rose only 0.5%.
Australian equity markets bounce back after selloffs in late 2018
Australian equity markets bounced back strongly after the lows of December, with growth in investor sentiment. The S&P/ASX 200 Accumulation Index gained 3.87%, driven by Resources (+9.16%), AREITs (+6.17%) and Small Ordinaries (+5.56%). Industrials grew 2.56% over the month. January saw Australian markets at a P/E ratio of 14, in comparison to the US market at 15 and Europe at 12. While Australian consumer sentiment and private sector credit was low in January, markets were assisted by the global market recovery following the sell offs in late 2018.
US Government Shutdown ends
The end of the month saw the Federal Government end its 35 days of shutdown with temporary funding to re-open government agencies until February 15. This has been the longest US government shutdown on record, with Trump insisting on $5.7bn funding for a wall on the southern US border. It has been made clear that the administration would be willing to shut down the government again, or declare the need for emergency funding. As a result of the shutdown, federal workers went unpaid for two pay cheques, resulting in work absences, reduced output and a fall in consumer confidence. There have been forecasts that this shutdown may have costed the US $6bn in productivity losses.
US economic indicators softer but markets lift
US data has been light as a result of the shutdown this month, causing uncertainty. At the end of the month, the Federal Reserve shifted towards a dovish tone, stating it would act with “patience” and keep rates on hold, which led equity markets to rally.
The Chicago Fed National Activity Index grew from 0.22 to 0.27 in January and the Dallas Fed manufacturing survey grew from -5.1 to 1.0 in January, both indicating expansion. The composite index rose to 54.5 in January reflecting strength in manufacturing, but a small slowdown in services. The Chicago PMI however, fell from 63.8 to 56.7 in January, signalling slowed expansion.
The US residential property market showed signs of slowing with home sales down 6.4% in December. Dwelling price growth slowed to 0.3% in November, after 0.4% in October. US unemployment rose, but remained at historical lows at 4.0% in January, while consumer sentiment fell from 98.3 in December to 91.2.
Equity Market returns improved globally, particularly in the US, with the S&P 500 up 8.01% and NASDAQ up 9.79%, despite concerns over the shutdown and trade disputes.
Slowed momentum across Asia
Chinese data has continued to soften with fourth quarter GDP growth reported at 6.4% annualised, the slowest since the GFC. Core contributors to this number are the deceleration in property investment, manufacturing data and retail sales. The Caixin manufacturing PMI fell from 49.7 to 48.3 in January, indicating accelerating contraction, while the services PMI also contracted but remained above 50. However, industrial production growth measures rose, as did government investment in infrastructure. The People’s Bank of China cut the Reserve requirement ratio by 100 basis points over the month to further stimulate the economy.
The Japanese Nikkei PMI fell from 52.6 to 50.3 in January, reflecting the slowed momentum across Asia and the wider global economy. Further, industrial production fell 0.1% in December, following 1.0% falls in November. Nevertheless, the labour market remains tight with the unemployment rate falling from 2.5% in November to 2.4% in December.
Amidst low inflation, the Bank of Japan left rates unchanged with a commitment to keep them low for the foreseeable future. Exports growth fell to -3.8% in December from 0.1% in November, reflecting concerns over global trade tensions.
The Hang Seng (+8.11), the Korean KOSPI (+9.03%), the Nikkei 225 (+3.80%) and the Shanghai Composite (+3.64%) all made gains on a total return basis.
Eurozone growth subdued, Italy falls into recession
Eurozone investor confidence remained flat through January and growth sat at expectations of 0.2% in the December quarter. Unemployment remained at 7.9%. The Eurozone PMI for January fell to 50.7 from 51.1, reflecting a slowdown in both manufacturing and services in the Euro region. ECB President Draghi mentioned protectionism as a cause for the depressed economic outlook, as European economies suffer from slowed demand from China. Rates were left unchanged.
Italy fell into recession in the fourth quarter, growth at -0.2% after -0.1% in the third quarter. However, in real terms, Italy has experienced negative growth for many years, along with high levels of government debt.
Germany experienced the weakest growth in 5 years, growing only 1.2% in the December quarter, which may be in part due to regulatory changes in the automotive industry. Nevertheless, German investor confidence rose in January.
Despite weak growth figures and instability surrounding Brexit, the STOXX Europe 600 grew 6.38%, with the FTSE 100 (+3.58%), CAC 40 (+5.54) and the DAX (+5.82%) all making gains after poor fourth quarter performance.
Brexit drama continues
Early in the month, the UK’s House of Commons voted 432 to 202, a majority of 230 against the Brexit deal – the largest loss in parliament for over a century. Theresa May was faced with an (unsuccessful) no-confidence vote triggered by the opposing party, and remains responsible to find a solution prior to the 29 March deadline. Later on in the month, May returned to Brussels with a new deal to negotiate with the EU, however the possibilities of a hard Brexit, a second referendum or an extension of the deadline are all being considered.
Despite Brexit instability, UK employment figures remain strong with an acceleration in wage growth. UK manufacturing activity continues to grow, albeit at a slower rate. However, consumer borrowing and mortgage lending slowed, a natural response to the political and economic uncertainty.
A more detailed summary, including January market data, is also available.
Information current as at 4 February 2019. 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.