McNaughton report The economic environment

March 2018

Economics Australia

The highest profile data release in Australia this month was clearly the GDP on 7 March. That printed 0.1% under expectations at 0.4% in the quarter (2.4% in the year) as domestic demand strength was offset by a net exports drag. Employment in February rose an in-line 18k m/m (consensus: +20k, previous: +12k), which held the y/y at 3.5%, the fastest since 2005. The unemployment rate surprisingly ticked up to 5.6% (consensus: 5.5%, previous: 5.5%) and is now the equal highest since 17 April. The confidence surveys showed a retracement in business confidence (11 points to 9), but an increase in conditions (18 points up to 21 points). Consumer confidence remains on the positive side, but much more weakly so, at only 103 points. CoreLogic national dwelling prices fell again in February, down 0.1% m/m. This saw the y/y pace of growth slow to just 2.2%, the weakest since February 2013. January residential building approvals rebounded a stronger-than-expected 17.1% m/m (consensus: +5%, previous: -20.6%) to a strong 238k annualised rate. Retail sales were below expected again, up only 0.1% m/m (consensus: +0.4%, previous: -0.5%), seeing the y/y fall to a weak 2.1%. The $1,055mn trade surplus beat expectations (consensus: $160mn, previous: -$1,146mn).

United States

Activity indicators for February generally remained solid: The manufacturing ISM rebounded to 60.8 (consensus: 58.7, previous: 59.1), while the composite non-manufacturing ISM retraced modestly to a still high 59.5 (consensus: 59.0, previous: 59.9). Non-farm payrolls beat expectations, rising 313k in February (consensus: +205k, previous: +239k), but the unemployment rate held at 4.1% (consensus: 4.0%, previous: 4.1%) on a large rise in participation. Average hourly earnings missed expectations, moderating to 2.6% y/y (consensus: 2.8%, previous: 2.8%). Retail sales also missed expectations, falling another 0.1% m/m (consensus: +0.3%, previous: -0.1%). February core PCE rose an in-line 0.2% m/m (previous: +0.3%), seeing the y/y tick up to 1.6% (consensus: +1.6%, previous: +1.5%). February PPI was up 0.2% m/m (consensus: +0.1%, previous: +0.4%). February housing starts retraced more than expected, falling 7.0% m/m (consensus: -2.7%, previous: +10.1%) to a 1,236k annualised rate. Conference Board consumer confidence retraced from a 17-year high of 130 in February to a still booming 127.7 in March (consensus: 131.0).


Early in the month, China's Caixin manufacturing PMI rose to 51.6 in February (consensus: 51.3, previous: 51.5), while February industrial production beat expectations, rising 7.2% y/y ytd (consensus: +6.2%, previous: +6.6%). The trade surplus was also larger than expected at $33.7bn (consensus: -$5.7bn, previous: $20.6bn) as exports surged and imports dipped on Lunar New Year seasonal effects. February total social financing moderated to 1,170bn RMB (consensus: 1,067bn RMB, previous: 3,060bn RMB).


EU March Flash Composite PMI fell by 1.8pt on the month, to 55.3 (consensus 56.8), reflecting a loss of momentum in both the services and manufacturing sectors. The services PMI fell by 1.2pt to 55.0 (consensus 56), and the manufacturing Flash PMI by 2.0pt to 56.6 (consensus 58.1). German IFO dropped to 114.7 from 115.4 in Feb (consensus 114.6).

Other news

In the name of national security, US President Donald Trump decided to impose a 25% tariff on steel imports and a 10% tariff on aluminum imports, as well as a 25% tariff on US$50 billion of Chinese imports (representing 10% of total Chinese
imports). Exemptions to the steel tariffs were granted to countries supplying 53% of all US iron, steel and aluminium imports.

On 19 March political consultancy Cambridge Analytica obtained unauthorised access to 50 million Facebook accounts. The controversy triggered a broad-based sell-off in the information technology sector, led by the FANGs (Facebook, Amazon, Netflix, Google), which were down 6.9%.

Moves wider in LIBOR and Bank Bill Swap Rate (BBSW) have dominated the market in March. Much of the movements in BBSW coincided with a significant widening in the USD LIBOR spreads likely driven by a combination of the significant rise in US T-Bill issuance (thanks to the tax cuts and increased spending); the re-establishment of US Treasury working capital post the decision to raise the debt ceiling; and the changes in corporate investment behaviour following changes to the taxation rules for US capital repatriation.


Bonds and Credit

Global government bond yields fell in March led by the US. US 10-year treasury yields dropped after the median projection for the Fed Funds rate for 2018 remained unchanged at three hikes against market expectations of a rise to four hikes. Economic data for Q1 in the US, while still strong, was also more mixed than in February.

Even on days when the equity markets were volatile, bond yields barely moved. The rally in bonds was an accumulation of small moves. Many of the moves in equities were triggered by headlines of a political nature. President Trump announced tariffs on steel and aluminium on 2 March, then further measures against China specifically later in the month. Trump moving to protect US intellectual property from Chinese ownership caused losses in the tech sector later in March (and into early April). Although bonds didn’t often move far, the overall erosion of confidence did eventually trigger a solid rally.

The rally in bonds towards the end of March saw the US 2Y rate finished near-enough unchanged at 2.27% (a 2bp sell-off). That was despite the FOMC delivering on a welltelegraphed move and increasing their forecasts for 2019 and
2020 via the dot plots. US 10Y yields fell 12 bpts to 2.74%.

With so much focus on the US, developments in China and Europe were of only secondary importance. In China, the data remained strongly affected by the Chinese New Year celebrations. In Europe, bond yields also tracked lower.

Australian 10 year bonds outperformed with yields falling 21 bpts to 2.6%. The 3/10 curve flattened 18bp to 55bp. The US 10-year yield spread fell 9bpts to -14bpts. The RBA decision to leave rates unchanged on 6 March was a formality.
Another month of excitement in credit markets globally. Risk of escalating trade wars (trade tariffs), abundant primary supply and heightened geopolitical tensions (Russian diplomatic expulsions) underpinned a cautious tone and a general move wider in credit spreads.


Global share markets fell for a second month in March after the out-sized gains recorded in January. There were three key events: the US Federal Reserve rate hike; a US announcement on proposed Chinese tariffs; and the revelation of data
breaches at Facebook.

On 19 March shares in Facebook fell 6.8% after it revealed that political consultancy Cambridge Analytica obtained unauthorised access to 50 million social media accounts. On 21 March the US Federal Reserve lifted the federal funds rate
by 25 basis points. And while the Dow gyrated on the day, it finished lower by only 45 points. On 22 March, US President, Donald Trump, signed a presidential memorandum outlining possible tariffs to be applied on Chinese goods.

Jitters about a US-China trade war and potential for greater regulation of technology companies led to big swings on global markets – especially in the US – over the final four trading days of March.

The S&P 500 was down 2.7% in March while the NASDAQ lost 2.9%. Europe also fell with the DAX down 2.7%, the Eurostoxx index down 2.3%, and the UK FTSE down 2.4%. Similarly, the Japanese Nikkei was down 2.8%.

Overall the MSCI EM index fell 2.0% while the MSCI World closed 2.4% lower.

The Australian market underperformed global counterparts, falling 4.3% with all 22 sub-industry sectors falling.

Commodities and Currencies

AUD underperformed against the majors in March. A stronger USD, lower commodity prices, and rising global trade tensions weighed on AUD/USD. Iron ore prices fell sharply through March (-6.9%) on surplus concerns further downstream in China’s steel market.

Tracey McNaughton

Tracey McNaughton

Executive Director
Head of Investment Strategy