McNaughton report Economic

April 2018


In Australia, economic data released in April was mixed. Retail trade increased 0.6% in February compared to expectations of a 0.3% lift, but employment rose by a softer than expected 4.9k in March (consensus: 20k). This follows a 6.3k fall in February. In line with the softer job gains, the unemployment rate has stabilised remaining at 5.5% for the first three months of the year. Building approvals fell 6.2% in February, more than the 5.0% expected. CPI data showed that the headline inflation rate rose by 0.4% in Q1-18, slightly weaker than market expectations for +0.5%. The two core measures both came in at +0.5% q/q as expected, but remain slightly below 2.0%, the bottom end of the target range.

United States

Although payrolls were soft at just +103K and the unemployment rate was 4.1%, the industrial production numbers were strong (+0.5% in the month) as was GDP (+2.3% against 2.0% expected). The detail of the GDP data was less impressive however, with private consumption rising by only 1.1% despite the boost to incomes in the quarter from Januarys tax cuts, and inventories making a relatively large 0.4% contribution to growth. As expected, the March US core PCE reading (the Fed’s preferred inflation measure) printed at 0.2% m/m taking the year-on-year print to 1.9%. Base effects were the primary driver for the 0.3% jump in the year-on-year reading to 1.9%, but notably the six-month annualised figure has also picked up and is now running at a 2.3% pace. The main takeaway here is that unlike other economies, US inflation is now essentially on target and the prospect is for inflation to rise further over the coming months. Further corroborating the inflation push, the Q1 Employment Cost Index (ECI) came in at 0.8%, up from 0.6%, in Q4 2017 and above the 0.7% expected while the Prices Paid component of the ISM Manufacturing Index jumped to 78.1 from 74.2 previous and 72.5 expected. Core producer prices now stand at 2.9% up from 2.7% previously while core CPI is up at 2.1% from 1.8% previously.


The Chinese economy defied expectations for slower growth with firm economic activity of 6.8% over the year to March. Strong retail sales, property investment and government spending boosted domestic demand.


Momentum in the euro area is taking a breather. German business confidence plunged the most in almost a year and sentiment deteriorated in Italy and France. The preliminary PMIs were largely in line with expectations but weaker on last month and remain consistent with a declining trend evident since January. March German retail sales disappointed (-0.6% vs 0.8% exp.) while soft German (1.4% y/y vs. 1.5% exp) and Italian (0.6 y/y vs. 0.8% exp.) inflation readings didn’t help the euro.

Other news

China cut the Required Reserve Ratio for qualified banks by 100bps in order to allow them to repay loans they took out from the People's Bank of China (PBoC) via medium-term lending facilities. Around CNY900bn will be repaid with an additional CNY400bn unleashed. China said that the objective is to maintain liquidity at reasonable and stable levels and the RRR moves does not suggest any significant change in policy. China says it still needs to maintain relatively high RRR to fend off financial risks.

The US Dept of Commerce has banned US companies from selling components to Chinese telecom equipment maker ZTE for seven years after ZTE was caught violating US sanctions by shipping goods to Iran. US companies are estimated to provide 30% of the components used by ZTE to make smartphones and other telecoms equipment.

During a keynote address on 10 April, Chinese President Xi Jinping said China plans to expand imports in part by lowering import tariffs for vehicles “considerably” and reduce import tariffs on some other products. Xi also noted he plans to create a more attractive investment environment, ease market access, and strengthen the protection of intellectual property rights in China.

The IMF left its 2018 and 2019 global forecast unchanged at 3.9% (the fastest growth since 2010), but upgraded Australia's economic growth forecast to 3% in 2018 and 3.1% in 2019 on the back of the fiscal stimulus provided by President Trump's tax cuts but warned of the impact of potential trade disputes.


Bonds and Credit

Global bond yields were mostly higher in April. The key to the sell-off appears to be the calming of the trade war between the US and China, the improvement in the tone of equity markets and the détente on the Korean peninsula.Equities

After consolidating in March, US 10Y yields spent April selling-off sharply. The peak was 3.05%, but a late-month rally saw the US 10Y close at 2.95%. Even with the late rally, that was enough for a 21bp sell-off on the month in total.

Adding the upward momentum in US yields was a continuation of the solid underlying data suggestive of growth and even inflation. The Australian market sold-off and steepened in response. The Australian 10Y yield rose by 17bps, to 2.77%, while the 3Y bond sold-off 13bps to 2.18%.

The Australian curve steepened by 5bp to 59bp. Meanwhile, the RBA kept the cash rate at 1.50% as was widely expected and there were no material changes to the post-meeting statement: “further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.”

The spread to the US was little changed overall. The Aus-US 10Y spread inverted 1bp further to -18bp over the month. The spread had ‘widened’ to just under -10bp mid-month on profit-taking and the pressure in repo, but recovered to be little changed after the CPI.

Global credit markets began the month with a general sense of nervousness around the implications of trade tariff escalation, but these simmered down somewhat following Xi Jinping’s speech at the Boao Forum on 10 April. CDS indices moved tighter, in line with global equity market strength, and a robust fundamental credit story.


Global share markets rose in April. Positive US company earnings, rising commodity prices and robust Chinese economic growth data more than offset investor concerns about geopolitical risks.

In the first week of April the US Dow Jones fell by 0.7%, S&P500 was down 1.4% and the Nasdaq fell by 2.1%. Fears over a potential trade war escalated after China announced US$50 billion worth of 25% tariff duties on 106 US import products, including soybeans and cars.

All eyes were on Chinese President Xi Jinping’s address at the Boao Forum for Asia. Xi announced he would promote import growth and open up China’s services sector to increased foreign investment. US President Trump appeared to soften his stance on Chinese tariffs, even going as far as to praise President Xi’s speech. US share markets rebounded as trade tensions eased.

A blockbuster US earnings season, however, failed to lift US shares into month-end suggesting much of the good news was priced in. To date, around 50% of US companies in the S&P500 have reported results. According to FactSet, almost 80% of companies have reported earnings above analyst expectations. That said, investors still fretted that current company earnings were “at the high watermark” following comments by industrial bellwether Caterpillar.

The S&P 500 rose a meagre 0.3% for the month as a whole while the NASDAQ was flat. Europe outperformed with the DAX up 4.3%, the Eurostoxx index up 5.2%, and the UK FTSE up 6.4%. Similarly, the Japanese Nikkei was up 4.7%.

Overall the MSCI EM index fell 0.6% while the MSCI World closed 1.0% higher.

The Australian market also outperformed the US, rising 3.9% lead by the Energy and Resources sectors up 10.8% and 9.8% respectively on the back of higher oil prices.

Commodities and Currencies

The currency story for the month was a stronger US dollar which was particularly strong against the yen. Oil rose by 5.7% on tighter supply and concerns the US will pull out of the Iran nuclear deal.

Tracey McNaughton

Tracey McNaughton

Executive Director
Head of Investment Strategy