The US Federal Reserve tightened monetary policy for the second time this year with two more rate hikes expected in the second half. In contrast, there is little to suggest any change to the “rates on hold” position currently in force in Europe and Australia, notwithstanding the better than expected GDP result domestically. 


Real GDP increased by 1.0% in the March quarter following a 0.5% rise in the previous quarter to be 3.1% above year ago levels. The result was slightly above market expectations but was met with a mixed reaction. Growth was largely driven by exports and government consumption spending which were seen as temporary boosts unlikely to be sustained in future quarters. However, other components including household consumption and investment also posted positive results which is encouraging in an environment where concerns continue to be raised about consumers’ ability to maintain spending patterns and business willingness to invest. On the issue of personal consumption, the Westpac-Melbourne Institute consumer confidence index posted a small increase in June and has been above the 100 level all year after spending most of 2017 with pessimists outweighing optimists. 


The US Federal Reserve increased the fed funds rate by 25 basis points to 1.75-2.00% at its June meeting. This is the seventh increase in the current tightening cycle that started in December 2015 and the second this year. Expectations are for two more rate hikes this year. The gradual approach the Fed is taking to normalise official interest rates reflects the unusual nature of the current recovery which has seen GDP growth at relatively low levels compared to previous recoveries. Furthermore, inflation pressures have been largely non-existent until recently despite the falls seen in the unemployment rate. US core inflation increased by 0.2% in May to be 2.2% above year ago levels. Headline inflation is running at 2.8% in part due to fuel prices which have increased more than 20% over the past year. The US unemployment was 3.8% in May having fallen from 4.3% a year earlier. 


The European Central Bank (ECB) met on 14 June, keeping its benchmark rate unchanged at 0% and providing a mixed update on the economic outlook. Growth expectations for 2018 were revised down to 2.1% from the previous forecast of 2.4%, with growth then expected to slow to 1.9% in 2019. Despite the lowering of the growth forecast, inflation forecasts for 2018 and 2019 were raised to 1.7% from 1.4% previously. The ECB’s inflation forecasts remain below their 2% target which prompted their guidance that interest rates were likely to remain unchanged at least until mid-2019. The less optimistic ECB outlook was also reflected in the Euro Area Business Climate Indicator which has come off highs seen earlier in the year and consumer confidence which is back in negative territory after six consecutive months of positive readings. 


Recent Yuan weakness has been blamed on a combination of the perceived impact of the trade war, softer Chinese data and the increasing interest rate differential with the US. Data for Chinese industrial production showed a marginal slowing to 6.8% year-on-year growth in May. More significant was the slowing in year-on-year retail sales growth to 8.5%. This is the weakest reading since the early 2000s and compares with the 10%-plus growth rates seen over the past 12 months. 


As in other regions, inflation readings jumped in May reflecting higher oil prices. Japanese producer prices rose by 2.7% year-on-year in May, although they were temporarily higher than this late in 2017. Consumer prices increased by 0.1%, following two months of significant decline and are 0.7% above year ago levels. Monthly Commentary – June 2018 in review 2



The Australian share market has again posted strong returns with a rebound in financials assisting overall performance. Internationally, trade war concerns and some signs of slowing European and Chinese growth stifled most markets, although the US S&P500 still managed to post a positive return. 

Australian shares

The S&P ASX200 Accumulation Index ended the month 3.3% higher. Despite trade war concerns between the US and various countries, Australian shares at one point in the month reached their highest level since early 2008. The energy sector had the strongest performance this month due to oil price increases while the Telecommunications sector has continued to perform poorly as Telstra fell to a seven year low during the month after announcing asset sales and significant job cuts. Local retailers have benefited this month after Amazon announced it will prevent Australian consumers from purchasing products from its overseas sites. 

The best performing sectors in June were Energy (+7.8%), Information Technology (+6.3%) and Consumer Staples (+6.2%). Worst performing sectors in the month were Telecommunications (-5.8%), Industrials (+0.7%) and Materials (+1.8%). Strong performers in the ASX100 included APA Group (+16.1%), Northern Star (+15.8%) and Caltex Australia (+10.6%). The worst performing stocks were Ramsay Health Care (-12.0%), AMP Limited (-8.7%) and CSR Limited (-8.6%). 

International shares

The MSCI World Index posted a -0.2% return in June. Trade war concerns between the US and various countries continued to plague markets throughout the month. The start of the month saw the US apply tariffs to metal imports from Canada, Mexico and the European Union who chose to retaliate with tariffs of their own. The risk of a full-blown trade war between the US and China intensified as Trump has proposed tariffs on US$50bn of Chinese imports and another US$200bn if China chooses to retaliate. 

Asian markets this month including the Singapore Straits Times Index (-4.7%), the HK Hang Seng Index (-5.0%) and the Shanghai Composite (-8.0%) all had poor performances this month. The Shanghai Composite’s lacklustre performance can be attributed to signs of slowing growth in China which has been amplified by the current trade war concerns with the US. 

Slower economic growth in European markets and trade disputes have negatively affected the Italy MIB30 Index (-0.7%), France’s CAC40 Index (-1.4%) and the German DAX Index (-2.4%). 

Fixed Interest and Cash

The Barclay’s Global Aggregate hedged in $A (+0.2%) had a positive return in June following the previous month’s 0.3% return. The Bloomberg Composite Bond Index returned 0.5%. Australian 10-year and 3-year government bond yields decreased while US 10-year and 2-year government bond yields increased this month. Unemployment levels in the US are equalling its lowest levels since 1969 while other economic data in the US remained sturdy which contributed to US rates moving higher. 


The S&P/ASX 200 AREITs index posted a positive return of 2.2% in May. Dwelling prices across Australia’s major cities have fallen for the ninth consecutive month due to tighter lending standards and lower investment activity. The combined capitals have fallen a further 0.3% while there has been no change in value in regional areas this month. There is now much speculation whether this negative trend will continue for the major capital cities with some forecasters predicting it could continue for years due to the potential for even tighter lending standards being implemented in the future. On the other hand, some believe the worst is over as auction rates have stabilised in recent months. 

Currency and Commodities 

The Australian dollar ended the month at US$0.7407 compared to US$0.7568 in May. The $A has continued to fall last month due to trade war concerns between the US and China as well as the interest rate differential between the two countries. Iron ore prices have risen 2.3% to US$67. Brent Oil prices have continued to rise due to OPEC raising production to lower levels than anticipated which is expected to add approximately 5 cents a litre to Australian petrol prices. 

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