Earnings season at home sees strongest monthly gains in markets since mid-2016.
Optimism lifted as the US extended a trade truce with China whilst at home it was mixed news as house prices continued to fall, wage growth remained slow but job growth continued to rise.
The situation at home looks uncertain as the RBA continues to try and solve the negative wealth effect associated with falling house prices. The cash rate was left unchanged at 1.5% in February as widely expected, but the case for a rate cut grows.
Wage growth remains slow, despite jobs on the rise. Consumers and businesses are cautiously optimistic, as they observe falling house prices, pressured further by a tightening of credit. The soft domestic conditions in conjunction with the accumulating downside risks surrounding slowdowns in global growth has given cause for a downward revision of global growth to 3.0% in 2019, and 2.75% in 2020.
In light of this weaker backdrop, February followed on from January’s momentum to bring on the strongest monthly gain since mid-2016, as the S&P/ASX 200 Accumulation Index advanced 5.98% in the month. The local share market was boosted by strong corporate earnings and the release of Hayne’s final Royal Commission Report.
Several developments were observed in what was an eventful month for the US. A call for a national emergency for funds to build the Mexican border wall was made by the US President but will be contested by the Democrats. Hopes rise for a trade deal as US President delays the deadline for a tariff increase on $200 billion of Chinese goods following constructive talks between American and Chinese officials. Later in the month, negotiations with North Korea’s leader in Hanoi to denuclearise the Korean Peninsula in exchange for lifting US sanctions ended without agreement.
In US data, the economy grew at a 2.6% annual pace in the December quarter. The trade deficit widened to $59.8 billion in December, underscored by a 1.9% fall in exports and a 2.1% rise in imports from an improvement in domestic demand.
The Chicago Fed National Activity Index came in at a weak -0.43 in January suggesting below trend economic growth. However, manufacturing activity continues to expand in the US, despite a slip to 53.0 in February from a reading of 54.9 in January (a reading above 50 indicates expansionary activity). The services sector similarly continued to expand with the Markit services at 56.0 for the month, up from 54.2 in January.
US residential property market began to respond to the support from a recent drop in mortgage rates with dwelling price growth rising 0.2% in December. The labour market remains tight with unemployment rates rising to 4% in January, but consumer sentiment improved to a level of 93.8 in the month following from 91.2.
News of the extended truce between the US and China lifted the Asian markets as the Hang Seng (+2.47), the Nikkei 225 (+3.02%) and the Shanghai Composite (+13.79%) all made gains on a total return basis. On the other hand, the Korean KOSPI (-0.43%) declined much towards the end of the month following an unsuccessful summit between Trump and Kim.
China’s trade surplus shrunk in January to US$39.2bn, from US $57.1bn in December. Exports rose 9.1% reversing a 4.4% drop in the month prior, while imports decreased 1.5% to USD $178.4bn, still significantly less than the 7.6% decline in December.
Inflationary pressures remain muted as easing in price growth was seen through annual CPI and PPI figures down 1.7% and 0.1%, respectively. The weakness points to the falling industrial profits and weaker factory activity. The Caixin China General Manufacturing PMI indicator reached a three month high in February at the 49.9 mark. This is in contrast to January’s recent low of 48.3, the improvement driven by renewed rise in output following a pick-up in domestic demand, but still remains below 50, signalling contraction.
Average prices of new homes in China rose by 10% year on year in January, making it the strongest annual gain since June 2017. However the weaker monthly increase of 0.6% from December’s 0.8% rise was reflective of the tighter measures since March 2017 to cool the property market.
The Japanese Nikkei PMI tipped into contractionary territory for the first time in two and a half years to 48.9 from 50.3 in January. Industrial production slid 3.7% in January, further highlighting the loss of momentum. Japan’s trade deficit widened in that month with the underlying annual pace of growth in exports contracting -8.4% from -3.9% in December. Import growth was similarly weak, slowing to -0.6% in the year to January, following an increase of 1.9% in the year to December.
The Japanese unemployment rate slightly increased to 2.5% in January, just above the 2.4% reported in the month prior. However, the job availability ratio remained unchanged at 1.63, suggesting a strong supply of jobs.
Subdued Eurozone growth continued to prove difficult highlighted by a string of weaker German data. China’s lower appetite for cars has caused a loss in momentum, observed in the December quarter. German factory orders slumped 1.6% in December and industrial production declined 0.4%. Given this backdrop, it came as no surprise for most that Europe’s largest economy recorded no growth for the final quarter of 2018, narrowly avoiding a recession.
More broadly, the European Commission cut its forecasts for economic growth for this year and the next, with the expectation to slow to 1.3% in 2019, citing slower car production in Germany, social tensions in France and uncertainty over budget policies in Italy. Industrial production in the broader Eurozone region fell 0.9% in December, taking the annual rate of contraction from 3.0% to 4.2%. Consumer confidence in February improved slightly, but remained in negative territory. The Eurozone manufacturing PMI for February fell further to 49.3 from 50.5, while improvement in the services PMI saw a rise from 51.2 the month prior, to 52.3. The unemployment rate held at 7.8% in January.
Over in the UK, the Bank of England left the cash rate unchanged at 0.75%, cutting growth forecasts from 1.7% to 1.2% for the year, with expectations that slower growth from weaker production and construction output observed in the close of 2018 will carry through. The Markit Services PMI fell to a reading of 50.1 in January with businesses citing Brexit as a source of weaker demands. Similarly the Markit Manufacturing PMI lowered to 52.0 in February from 52.6 in January. In both cases, the readings remain above 50, indicating expansionary activity.
A more detailed summary, including January market data, is also available.
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