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Weekly Market Update – 12th December 2014
Investment markets and key developments over the past week
- China’s economic activity data for November is mixed but is still consistent with solid 7% economic growth. Industrial production recorded an annual rise of 7.2% which is a slowdown compared to October’s 7.7% result. Chinas production activity for November appears to be impacted by the APEC meeting in Beijing.. Chinas retail sales rose by a robust 11.7 % for the year to November. This is a particularly encouraging result suggesting that consumption is becoming a key driver of China’s growth.
- Japan’s lower house election on December 14th has seen the Shinzo Abe Government returned to office. This is encouraging from a political stability viewpoint. However, given Japan has slipped into recession in 2014 with minimal progress on structural reform, it suggests the country is still facing formidable challenges in achieving solid and sustainable economic growth. Therefore “Abenomics” remains a ‘work in progress’.
- Australias Reserve Bank (RBA) Governor Glenn Stevens gave a newspaper interview highlighting that the Australian economy needs a “bit more in the way of confidence”. The Governor suggested that the Australian Dollar “will a year from now be lower than it is today” also commenting that “probably 75 is better than 85” cents against the US dollar. For Australian interest rates, the Governor noted that holding the cash rate at 2.5% is “giving a message of stability”. However Mr Stevens also noted that the RBA “will take a fresh look at all these things in the new year”, suggesting there is a scope for an interest rate cut in early 2015.
- Australia’s regulator APRA has written to financial institutions to signal increased attention on housing mortgages which are higher risk (e.g. high loan-to-income loans & high loan-to-valuation (LVR) loans as well as lending to property investors). APRA has signalled that loan growth to property investors above a threshold of 10% is an important risk indicator for financial institutions.
Major global economic events and implications
- America consumer spending recorded a robust result for November. US retail spending rose by 0.7% in November compared to Octobers 0.5% gain. There were broad based spending gains across sectors with car sales (+1.7%), building materials (+1.4%) and clothing (+1.2%) being the standout performers. This positive spending result suggests that US economic growth is running at a strong 3% pace in the December quarter. Consumer sentiment is also very encouraging. The University of Michigan sentiment survey rose by +5 points to 93.8 in December which is an eight year high. These strong retail sales and consumer sentiment results strengthen the case for the US central bank to raise interest rates in mid-2015.
- European industrial production recorded a marginal 0.1% monthly gain in October, suggesting Europe’s recovery remains fragile. Germany posted a flat production result, but there were notable falls in French and Italian production which is representative of these troubled economies.
- Global shares had a poor week as the falling oil price adversely impacted energy companies while financial markets worried over 2015 growth prospects for China and Europe. American shares (S&P 500) fell by 3.5% for the week. European shares had a particularly bad week (down 6.4% for the Eurostoxx index) as European economic data remains sluggish while Greece’s political circus has returned with the forthcoming presidential election. Japan’s TOPIX also struggled with a 3.2 % decline ahead of their parliamentary election.
- Australia’s ASX 200 had a disappointing week with a 2.2 % decline. Commodity price declines weighed on the resource sector while the Murray Inquiry call for banks to have higher capital requirements saw financials fall.
- Government bond yields in America and Germany responded to the weaker global share performance and lower oil prices with a sharp fall in yields. American 10 year government bond yields fell by 22 basis points to 2.08%. German 10 year bond yields declined by 16 basis points to 0.62%. For Australian 10 year bond yields, there was a similar sharp decline in yields by 20 basis points to 2.84%.
Australian economic events and implications
- Australia’s employment rose strongly in November with an increase of 42,700 jobs. However, the gains were concentrated in part-time positions. Australia’s unemployment rate continues to drift higher as the growth in labour supply of 1.6% annually outweighs employment growth of 1.2%. Australia’s unemployment rate drifted up by a further 0.1% to 6.3% in November. This is the highest unemployment rate since September 2002. Even more concerning is the rise in the “labour under-utilisation” rate to 15.0% (this measure combines both the unemployed as well as worker’s wanting more hours). Australias under-utilisation rate is now at its highest level since 1997.v
- The NAB Business survey for November indicates more sedate confidence responses. “Business confidence” slipped by 4 points to +1 in November.
- The Westpac-Melbourne Institute consumer sentiment survey recorded a sharp slide of 5.5 points to 91.1 in December. This is the lowest sentiment reading since August 2011.
- Given the recent business and consumer surveys show a heightened sensitivity to negative news and with recent economic activity on the disappointing side, particularly the September quarter’s real GDP figures, the RBA appears likely to cut interest rates again.
What to watch over the next week?
- The US central bank (“Fed”) will hold their final monetary policy meeting for 2014 on Tuesday and Wednesday. The financial market focus will be on whether the Fed gives any signal on when it is likely to start raising US interest rates in 2015. American housing starts and the NAHB builder’s survey should provide a positive update on the US housings sector performance.
- China’s HSBC manufacturing PMI for December will give a timely measure of economic activity. Given current economic growth concerns, markets will be focusing on how Chinas manufacturing activity is performing.
Outlook for markets
- Global Shares should make solid gains next year. Share valuations are supportive given strong profit growth, low cost pressures and easy financing conditions. Global monetary policy should remain very accommodative given further quantitative easing (QE) in Europe and Japan, further interest rate cuts in China and only a gradual US interest rate tightening process in 2015. Global shares are particularly attractive on a relative basis compared to very low government bond yields.
- However Australian equities are likely to be only a modest performer in the short term as commodity price weakness weighs on investor sentiment. A further RBA interest rate cut early in 2015 and a lower Australian dollar should progressively become supportive for Australian shares in 2015.
- Low global yields suggest modest medium term returns from government bonds. However given weak commodity prices, subdued wage pressures and significant spare capacity in the global economy, government bonds should see only a gradual rise in yields in 2015.