The Month in Review - May 2018
Monthly Review
Farrow Hughes Mulcahy Investment Research 12 June 2018
Equity markets were mixed during May with the Australian ASX 200 up 1.1% and International markets were steady rising 0.3% (MSCI world $US).
US data remains strong. Housing starts fell, but strength in homebuilder conditions points to a continuing rising trend and April retail sales, industrial production, May manufacturing conditions in the New York and Philadelphia regions and the leading index were all strong. The prices received component of the Philadelphia survey is at its highest since 1989 pointing to higher inflation. Our view remains the Fed will hike three more times this year and the money market is gradually coming around to this view…all of which means more upside for US 10-year bond yields. They broke decisively above 3% over the last week for the first time since 2011 and, while negative sentiment towards them suggests the risk of short term decline in yields, they look to be heading to 3.5% by year end.
No early exit from easy money in Japan. The Japanese economy went backwards in the March quarter for the first time since 2015 and core inflation slowed to just 0.4% yoy. While business conditions surveys point to a rebound in growth, falling and way below target inflation confirms that the BoJ won’t be rushing to the exits from easy money any time soon.
Chinese data was a mixed bag with stronger growth in industrial production and a fall in unemployment but slower growth in retail sales and investment. Overall it suggests continuing solid growth, but some slowing in domestic demand.
First quarter growth for the Australian economy was better than expected. The economy expanded by 1.0% q/q or 3.1% y/y. However, the strong numbers mask softer underlying trends. Net exports and inventories drove growth in the first three months of the year, largely thanks to natural gas finally coming on line. The trouble is that net exports can have a transitory impact on growth. So while better trade may help growth next quarter, beyond that the effect will fade. Meanwhile, households contribution to growth continues to weaken and as the savings rate falls, so does the buffer to an income shock. There are still many challenges for the longer run prospects of the economy in Australia.
Volatility in share markets is likely to remain high as US inflation and interest rates move up and as issues around President Trump (trade, Mueller inquiry, etc) continue to impact ahead of the US mid-term elections in November, but the medium-term trend in share markets is likely to remain up as global recession is unlikely in the next 12 months and earnings growth remains strong globally and solid in Australia.
National capital city residential property prices are expected to slow further as the air continues to come out of the Sydney and Melbourne property boom and prices fall by another 5% this year, but Perth and Darwin bottom out, Adelaide and Brisbane see moderate gains and Hobart booms.
Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.2%.
The A$ likely has more downside to around US$0.70 as the gap between the RBA’s cash rate and the US Fed Funds rate pushes further into negative territory. Solid commodity prices should provide a floor for the A$ though.
Important note: While every care has been taken in the preparation of this document, Farrow Hughes Mulcahy make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.
