ECONOMIC UPDATE OCTOBER 2018
Global employment continues to improve in October, however markets have reacted negatively to trade risks, Brexit uncertainty and concern over Italy’s fiscal position.
Australia’s unemployment rate at lowest in 6 years
The September quarter saw consumer prices increase 0.4%, just below the market median forecast of 0.5%. Inflation continues to bump along just at or below the RBA’s target band, whilst the RBA cash rate remains at 1.5%. Australia’s unemployment rate fell to 5.0% in September, the lowest rate in six years. September also saw a rise of 5,600 jobs, below expectations of 15,000, however full-time jobs grew by 20,300. The proportion of full-time workers appears to be increasing with 80% of all jobs created in 2018 being full-time.
Consumer sentiment on the rise
The Westpac Melbourne Institute Index of Consumer Sentiment rose to 101.5 in October from 100.5 in September. The boost in sentiment from the tax cuts announced in the May has faded, while the leadership change, mortgage rate increases, declining house prices and rising petrol prices have been weighing on confidence. Furthermore, dwelling approvals fell by 9.4% in August, following a 4.6% decline in July, in response to the tighter credit market and weak house price growth.
Australian shares down
The Australian share market followed the lead of a sell-off in global equity markets over October with the S&P/ASX200 Accumulation Index losing 6.1% over the month. Major Australian indices were all down, with the S&P/ASX 200 Accumulation Industrials Index (-5.9%), the S&P/ASX 200 AREIT Accumulation Index (-3.1%) and the S&P/ASX Resources Accumulation Index (-6.6%) all losing ground. The S&P/ASX Small Ords Accumulation Index was the hardest hit, falling 9.6% over the month.
US markets fall as trade ‘wars’ and rising bond yields hit investor confidence
US GDP in the US grew by 3.5% annualised over the September quarter, down from the prior quarter’s rate of 4.2%. Despite concerns regarding increased tariffs, geopolitical risk and rising borrowing costs, the labour market and consumer confidence remains strong. The US labour market is close to full employment, with the unemployment rate at 3.7%, down from 3.9% in September, representing a 48-year low. Meanwhile, wage growth remains stable at 2.8%.
Volatility across markets
US consumer prices rose less than expected in September, reinforcing the Fed’s gradual path on increasing rates. Both the headline and core CPI rose 0.1%, below consensus expectations for a 0.2% rise. These figures were driven by low price growth in housing and education, as well as an irregular, steep fall in used car prices. The annual core CPI rate was unchanged at 2.2%.
Volatility swept markets in October, resulting in all major global indices experiencing significant declines. In the US, the S&P500 (-6.8%), Dow Jones (-5.0%) and Nasdaq (-9.2%) were all lower on a total return basis, with rising US Treasury yields and geopolitical concerns among contributing factors to investor sentiment.
Asia’s growth slows, while China tackles trade concerns
Chinese macroeconomic concerns remained in October with annualised growth at 6.5% for the most recent quarter that was slightly below expectations of 6.6%. A combination of factors, including increased tariffs and the Chinese government’s goal to slow credit growth, caused the IMF to downgrade their projection of GDP growth in 2019 from 6.4% to 6.2%. The central bank for the People’s Republic of China cut the required reserve ratio for the second time in three months amid slowing economic growth and ongoing trade concerns. The central bank lowered the amount of reserves some lenders are required to hold by 1%, increasing the amount of credit banks can extend to its customers, creating liquidity and multiplier effects through the economy.
Japan increases consumption tax
Economic data was mixed on the back of the recent natural disasters in Japan, although monetary policy remains stable. The Japanese government confirmed a consumption tax increase for October 2019, for which they are also designing alternative stimulus measures to mitigate resource dislocation.
Asian markets were substantially sold-off over October, with Japan’s Nikkei 225 Index (-9.0%), the Shanghai Composite (-7.8%), Hang Seng (-10.1%) and Korea’s KOSPI (-13.4%) all losing ground on a total return basis.
Growth in Europe weakens but still on course amidst Brexit and Italian fiscal risks
In Europe, GDP was below expectations for the September quarter at 0.2%, compared to 0.4% growth in the previous period. The ECB kept monetary policy on hold, stating that economic data was not as strong as expected, but still on course for long term growth, with net asset purchases to conclude in December. However, the Euro weakened on the back of US dollar appreciation and rising European political instability in the UK and Italy.
The EU Summit in Brussels focused on strengthening the bilateral ties between the EU and Asia, although Brexit was a major focus. Britain and the EU have extended the deadline to organise a deal and thus the situation remains uncertain. There are some positive indicators for the UK consumers, with wage growth at 3.1% (annualised) and inflation falling. However, the UK budget was published early and the Office for Budget Responsibility revised GDP growth for 2018 down from 1.5% to 1.3%.
Deficit for Italy’s 2019 budget
Italy’s 2019 budget, with a deficit of 2.4% (0.8% above that of 2018), was rejected by the European Commission and a new budget is to be revised. Moody’s has kept the country’s debt rating at investment grade, although the 10 year government bond spread between Italy and Germany rose to a high of 330 basis points (3.3%) in October, showing the market’s concern over their fiscal situation.
European market decline
Major European markets were significantly lower with the STOXX Europe 600 Index losing 5.5% on a total return basis. This was led by the French CAC 40 Index (-7.3%), while the German DAX (-6.5%) and UK FTSE 100 (-5.1%) also came under pressure.
Information current as at 18 October 2018.
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