Economic update June 2019

3 min read

The RBA delivered its first move in its monetary policy since August 2016. Another temporary trade truce was formed between the US and China. Commodities continued to surge, with all major asset classes delivering positive returns for the final month of the financial year.

Australia

In a move that was widely expected, the RBA delivered its first rate cut in 34 months to trim 0.25% from the cash rate bringing it to a record low of 1.25%. The monetary policy decision was largely taken to support the labour market. Further cuts to the cash rate are expected in the coming months. The Melbourne Institute’s inflation gauge held flat for another month, with the annual rate coming in at 1.6% for June, while the unemployment rate held at 5.2% in May.

Given that the cut was highly anticipated, its effect on the Australian share market was not exaggerated. That being said, the ASX, like many of its global peers, delivered strong positive returns in June. The ASX 200 rose 3.70% supported by accommodative central banks and stronger iron ore prices, which reached record highs to deliver 14.10% in the month.

The NAB Business Survey revealed a deterioration in business conditions in May, which fell 3 points to 0. This contrasts with the higher readings of business confidence, which jumped from 0 to 7 in the same month. The Westpac-Melbourne Institute consumer sentiment index moved lower to 100.7 in June, from 101.3 in May, but with the house price expectations index lifted significantly to 109.7 from 89.7 in the previous month.

June’s 0.1% fall in dwelling prices was the smallest since March 2018, and is the sixth consecutive month whereby the fall in prices has lessened. Sydney and Melbourne led the improvement with prices lifting by 0.3% and 0.2% respectively. This was the first lift in two years for Sydney and 19 months for Melbourne.

US

The G20 summit in Osaka proved fruitful with the establishment of a truce between the US and China on additional tariffs, while signalling a restart to trade talks. This provided relief after a month of rising and spreading geopolitical tensions between the US, Germany and Iran. On rates, the US Fed left rates within the 2.25% to 2.50% range, but appeared to tilt towards an easing bias, citing increased uncertainties around the labour and inflation outlook.

In response, global equities rebounded from the previous month’s dip. The MSCI World ex Australia (Unhedged, $A) Index returned 5.27% in June. The US Fed’s shift from a neutral to an easing bias played greatly in support of the markets with the S&P 500 having gained 7.05% and NASDAQ also up 7.51%.

The US trade deficit narrowed to $50.8bn in April off the back of declines in exports and imports. Factory orders were also revised down to reflect a 0.7% decline in May. Core CPI in May slowed to 2.0% from 2.1% in April, taking the annual growth rate down 0.2% to 1.8%.

The US unemployment rate rose to 3.7% in June from its 49-year low of 3.6% in the month before. Nonfarm payrolls advanced 224,000 following a much weaker increase of 72,000 in May. The labour market has been impacting consumer sentiment, with confidence plunging 9.8 points in June, to 121.5 – its lowest level in almost two years.

Asia

China’s trade surplus widened to US$41.7bn in May from US$13.8bn in April on higher exports, but weaker imports. 

Inflation continues to be supported by temporarily elevated food prices. The consumer price inflation lifted to an annual rate of 2.7% in May from 2.5% in the month before. The producer price inflation eased to 0.6% in May from 0.9% in April as a result of lower broad based commodity prices. Activity indicators suggested deterioration of conditions and activity in June, with the manufacturing PMI having fallen to 49.4. The deterioration is reflective of the impact of the impact of the trade dispute with the US.

The Bank of Japan (BOJ) held rates steady showing little sign of any intent to move rates in the near term. Japan’s key inflation gauge added pressure to the BOJ after it was reported to have edged lower from its six-month high of 0.9% to 0.7% year-on-year in May. A weaker outlook continues to be suggested for Japan’s manufacturing sector as the Tankan survey revealed the large manufacturing index dipped 5 points to 7 in the June quarter.

Notwithstanding the weaker conditions in Asia, easing trade tensions in the days leading up to the G20 Summit led the Asian markets to respond positively, following a global upward trend with the Hang Seng (+6.10%), Nikkei 225 (+3.52%), Korean KOPSI (+4.35%), and the Shanghai Composite (+2.77%) all gaining on a total return basis.

Europe

The Euro region continued to show signs of loss in momentum as the core inflation annual growth rate slowed further to 0.8% in May. The results were below consensus and were a source of pressure to the ECB, who appeared to be growing prepared to provide more stimulus should inflation fail to pick up. Unemployment, however, continued its decline to read at 7.5% in June and is the lowest rate since July 2008.

Despite weaker data, the collective positive sentiment around accommodative central bank biases followed into the European markets, sending local markets higher. Gains were seen amongst the STOXX Europe 600 (+4.52%), FTSE 100 (+3.69%), CAC 40 (+6.36%) and the DAX (+5.73%).

In the UK, the search for new leadership narrowed down to two candidates, Boris Johnson and Jeremy Hunt, with the former, at this stage being the favoured contender.

The Bank of England (BOE) held the bank rate at 0.75% in June and maintained a tightening bias. Headline inflation remains within target range and was reported at 2.0% year-on-year in May. Core CPI eased 0.1% to 1.7% in the same period. The unemployment rate was left steady at 3.8%, but a pickup in wage growth was positively welcomed. Weekly earnings excluding bonuses lifted from an annual rate of 3.3% in March to 3.4% in April. 

A more detailed summary can be found here.

 

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Information current as at 30 June 2019.

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