MONTHLY COMMENTARY - JANUARY 2019
Developments in the global economy
Inflation remains subdued globally; previously this was seen as reflecting changed market structures, increasingly the current lack of inflation pressures is being linked to weaker growth. Monetary authorities in developed markets left official interest rates unchanged but the Bank of Japan has increased its quantitative easing with growth and inflation still significantly below target.
The Consumer Price Index increased by 0.5% in the December quarter to be 1.8% above year ago levels. The largest increases in the quarter were in Alcohol and Tobacco (+3.2%) and Recreation and Culture (+1.1%) while prices fell for Communications (-1.3%) and Transport (-0.7%). With inflation just below the Reserve Bank’s target range it is unlikely to be a significant influence in determining monetary settings in the period ahead. The Westpac-Melbourne Institute Index of Consumer Sentiment fell back below 100 in January indicating more pessimists than optimists. Given the turmoil seen in financial markets and falling property prices it is surprising sentiment did not fall further. Employment increased by a seasonally adjusted 21,600 in December, although full-time employment decreased by 3,000. The unemployment rate fell to 5.0% from 5.1% a month earlier.
The US Federal Reserve left rates unchanged at their January meeting as expected but recent market volatility and weaker economic data meant the Board minutes still warranted scrutiny. The statement painted a positive view of economic growth but suggested inflation pressures were not as strong as previously feared. The Fed also paved the way for a more measured reversal of the quantitative easing stimulus. US non-farm payrolls increased by 312,000, rebounding strongly after a disappointing 176,000 increase in November. Despite the rebound, the unemployment rate increase to 3.9% in December from 3.7% a month earlier. Business and consumer sentiment have been hurt by the combined impact of the government shutdown, ongoing trade tensions and market volatility. The ISM Manufacturing PMI fell to 54.1 in December from 59.3 while the preliminary reading for January for the Michigan Consumer Sentiment Index fell to 90.7 from 98.3.
European confidence continues to suffer. The Euro Area economic sentiment indicator which combines the views of manufacturers, service providers, consumers, retailers and constructors fell to 106.2 in January from 107.4 a month earlier. A year ago, the index was at a lofty 113.6. Consumer confidence remains negative but appears to have bottomed late last year. This may partly reflect recent improvements in labour markets. The EU unemployment rate remains high at 7.9% but has recently moved below the 8% level and is almost 1% below the unemployment rate of a year ago. There were no significant developments from the European Central Bank’s (ECB) January 24 meeting, although they did acknowledge that economic data was weaker than expected and that it appeared that ‘geopolitical factors’ and trade issues were impacting sentiment. They concluded that significant monetary stimulus is still required.
Weaker Chinese trade figures are confirming expectations of the impact of trade sanctions. Chinese exports fell 4.4% year-on-year in December while imports have fallen 7.6%. While clearly an unwelcome development, care needs to be taken attributing the decline to trade frictions. Exports of aluminium have increased around 20% in the year to December despite the US tariff.
The Bank of Japan’s quarterly outlook saw them lowering their 2019 inflation forecast to 1.1% from 1.6% but upgrading GDP growth slightly to 0.9% from 0.8% previously. With respect to quantitative monetary policy, they agreed to increase the purchases of exchange trade funds and Japanese real estate investment trusts. Monthly Commentary – January 2019 2
Developments in financial markets
Positive noises from the US Federal Reserve that further rate hikes may not eventuate given well-behaved inflation together with some easing in trade tensions saw equities bounce back following a dreadful end to 2018. The Fed’s pronouncements also helped bond yields end the month lower. Concerns remain around the economic outlook and the repercussions of a tariff war but the extreme pessimism of the latter part of last year appears to have passed.
The S&P/ASX 200 Accumulation Index returned 3.9% in January following December’s -0.1% decline. The resources sector benefited from improved commodity prices and improved sentiment increasing by 9.2% in the month. Small caps also benefited from reduced risk expectations, outperforming their larger cap counterparts and returning 5.6% in January. All sectors except financials posted a positive return with the impending release of the Royal Commission result sidelining investors. The best performing sectors were Energy (+11.5%), Information Technology (+9.3%) and Telecoms (+7.8%). The worst performing sectors were Financials (-0.2%), Consumer Staples (+2.8%) and Industrials (+3.1%). At the stock level, the worst performing stocks in the ASX100 were Challenger (-23.7%), Resmed (-17.9%) and AMP (-7.8%). The best performing stocks were Fortescue Metals (+38.4%) which benefitted from higher iron prices as well as Worley Parsons (+21.5%) and Magellan Financial Group (+21.2%).
The MSCI World ex Australia Index returned 7.4% in January, but this only partly retraces December’s 8.0% fall. Improved market sentiment flowed through to emerging markets which returned 7.2% but they are still in negative territory over the past 12 months.
Over the month, the S&P 500 returned 8.0% with the Fed’s post meeting commentary allaying concerns around the impact of higher interest rates on the economy and equities. European markets fell short of the US’s strong bounce although the Italian sharemarket managed a 7.7% increase. France’s CAC and Germany’s DAX returned 5.5% and 5.8% respectively. The Shanghai Composite increased by 3.6%, recouping December’s 3.6% loss.
Fixed Interest and Cash
Bond markets again posted positive returns in January although it did not appear to be driven by risk aversion to the same extent as December. The Bloomberg Barclays Global Aggregate Bond Index hedged in $A returned 1.0% in December and 3.3% for the year. Unlike December, the Australian market lagged with the Bloomberg AusBond Composite Bond Index posting a 0.6% return in the month and 5.5% for the year. The US Federal Reserve left official rates unchanged and the US 10-year government bond yields fell only slightly to 2.63% from 2.68% at the end of December. Despite expectations the Fed would now limit further tightening in 2019, shorter dated bond yields fell by a similar amount.
Improved market sentiment and lower bond yields proved a constructive mix for property trusts in January. The S&P/ASX 200 AREIT Accumulation index returned 6.2% in January again outperforming the broader market. Global REITs bounced back sharply, returning 10.2% following December’s 6.3% decline.
Currency and Commodities
Stronger commodity prices across the board and reduced expectations of further US rate hikes saw the Australian dollar rise to end the month at US$0.7276. Iron ore prices increased 18.2% following December’s 10% rise. Iron ore prices are now at US$84.5/mt compared to the recent low at the end of November of US$63. Metal price increases ranged from 17% for nickel to 3.4% for copper. Gold increased by 3.5% in January despite some easing in market uncertainty. West Texas Intermediate (WTI) oil prices increased by 18.9% in January to end the month at US$54 per barrel.