Economic Snapshot – July 2016

Economic Snapshot – July 2016

In Summary – a look at July 2016

The turbulence world financial markets unleashed by the surprise Brexit vote at the end of June quickly disappeared in July as it became apparent that any immediate negative impact would more than likelybe restricted to the UK. The issue of sorting out the actual exit has also been realised as a long term
programme meaning there’s no need to overreact.

What markets did do, is turn their attention back to the pace of economic growth and its implications for central bank policy. In general, the latest data show no signs of imminent recession in major key economies like the US and China. Equally there’s not enough US growth to clearly compel the Federal Reserve to lift interest rates in a hurry. Combined with expectations of further monetary stimulus in the UK, Europe and Japan, the markets were happy to resume buying both equities and government bonds.

After holding the cash rate steady in June, the Reserve Bank cut to a new record low of 1.5% on August 3rd. This came in the wake of the inflation report for the second quarter which, as expected, showedinflation remaining below the bottom of the Reserve Bank’s target range.

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Economic Snapshot – 2016 Review & 2017 Outlook

Economic Snapshot – 2016 Review & 2017 Outlook

In summary

In hindsight 2015/16 proved to be a volatile year of repeating mini crisis’. Despite the erratic political and economic news, we still enjoyed modest growth in most of the traditional main stream asset classes. This ended up coupling nicely with some surprisingly buoyant returns in bonds, small cap equities and listed property. Although this was an impossible task to foreshadow at the beginning of the year, diversification into what is traditionally the more volatile areas proved beneficial for investors.

Overall the year seemed to be full of new surprises, triggering bouts of volatility in equity markets and ever lower sovereign bond yields. It started with China’s devaluation in August 2015, shortly followed with OPEC’s decision to push the price of oil down to regain lost market share, and then extenuated with the Federal Reserve [Fed] in the USA generating on-off again messages about lifting interest rates. Finally, we had the surprising Brexit vote with the UK referendum deciding to withdraw from the European Union. Not surprisingly, this all undermined investors’ confidence in the global economy. However fears of imminent recession proved overdone as global growth slowed and resilience emerged in keeping with economic fundamentals. Some would say a victory for the economists.

In this very unusual environment investors continued to seek yield (Real Estate Investment Trusts and Infrastructure) while avoiding riskier growth assets (Emerging Markets). The US cash futures market ended the year pricing in no further move from the Fed for the better part of the next two years. Many commentators feel this is overly pessimistic and believe it’s likely that the Fed will have to take some cautious tightening steps in the coming year.

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Economic Snapshot –   May – June 2016

Economic Snapshot – May – June 2016

In May we experienced an important realignment of interest rate expectations – both here in Australia and in the USA. Both countries are resisting a change of rates for differing reasons. There has been softer than expected inflation data in Australia leading to a holding strategy on rates whereas the USA had stronger than expected spending data – but is communicating concern about Britain leaving the European Union which in turn has led to a similar hold strategy. All things being equal and assuming Britain remain in Europe the USA is more likely to increase rates. We live in interesting times?

In Australia, the market priced another cut in the cash rate, while in the USA the market brought its short-term expectations for the cash rate more into line with the Federal Reserve’s guidance. These changes in the market’s expectations about interest rates contributed to a modest but renewed depreciation of the $A – which continues to show resilience upside strength beyond expectations.

Australia

 Economic data for Australia released in May prompted further expectations of lower domestic interest rates. For example, the latest wage price index figures showed hourly rates of pay grew by a mere 0.4% in the March quarter and by 2.1% over the past 12 months. This was the lowest reading in the last 20 years. Economists have noted that this pace of wage inflation is lower than history suggests it should be given where the unemployment rate is at the moment.

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Economic Snapshot for March – April 2016

Economic Snapshot for March – April 2016

Portfolios in March saw further improvement in global investor sentiment as fears of a recession faded due to better news on key economic data and some stability returning to the oil market. Equities recorded a positive return for the month, with emerging equity markets outperforming particularly well after their recent difficult months. The normal monthly graph looks significantly different to the 3 month equivalent for the first quarter of the year and as such we have included the latter for a better perspective. US equities for example have now achieved a moderate return of 1.18% for the quarter but this is due to a strong rebound of over 6% in March. This is a poignant reminder that when we take into account a minimum 5 year time horizon the graphs are merely snapshots of a point in time.
In the US, there were further signs of labour market strength and some welcome improvement in the pace of manufacturing activity. Core inflation also continued to edge higher. However, the Federal Reserve again reiterated its preference to move cautiously with further interest rate increases. This inevitably undermined the US$ and resulted in speculative trading and volatility.

There were also encouraging signs of improving economic conditions in China, with the manufacturing index rising to its best level since June 2014. This reflects the impact of further monetary and fiscal stimulus from the Chinese authorities in recent months.

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Economic Snapshot – Jan-Feb 2016

Economic Snapshot – Jan-Feb 2016

January was an extremely difficult month for the world’s financial markets with very sharp falls in the price of equities and commodities. Price volatility both within and between days was exceptionally high. These conditions were attributed to the surprisingly large fall in the price of oil, economic data
from China, the US Federal Reserve [Fed] lifting interest rates and concerns about the state of emerging economies. All this led to speculation about an imminent recession and even “the next leg of the GFC” with some extraordinary statements issued from a Bank Of Scotland analyst saying it is “time to sell
everything”.

In reality these comments appear more colourful than constructive, with the economic data revealing nothing to support that much pessimism. The markets continued to selectively misinterpret the data from China, and although the US manufacturing sector showed further signs of slowing, the household
sector remains robust. In Australia, the latest data confirmed recent improvements in the labour market, while inflation remained at the lower end of the Reserve Bank’s target range.

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