American economic growth data improved in the March quarter with annualised 2.5% growth. The positive gross domestic product (GDP) contributors were solid consumer spending (+0.8% quarter-on-quarter), robust housing construction (+3.1%) and inventory rebuilding (+1% to GDP). Yet there were soft spots with private business investment in structures were flat. Notably government spending was weak and there was a sharp fall in military spending (-2.9%).There were also some early signs that the ‘sequestration’ budget spending cuts are starting to negatively impact activity and this could be a headwind for economic activity. Overall this report is consistent with a mild 2.5% real GDP forecast for 2013. New job gains were disappointing in March with payroll data increasing +88,000. This suggested overall labour demand has moderated. The fall in the unemployment rate by 0.1% to 7.6% reflects a lower participation rate and thereby does not suggest that the quantitative easing measures are set to terminate in the near term.
In Europe labour markets continued to generally weaken given the recession. The Eurozone recorded its highest unemployment rate since the data began in 1995. The European Central Bank (ECB) kept the key policy interest rate steady at 0.75% but acknowledged that Europe’s “weak economic activity has extended” into 2013. Europe’s purchasing managers index (PMI) manufacturing survey declined by -0.3 point to 46.5 in April. As the reading is below 50, this PMI suggests that European industrial production and broader economic activity have contracted. This activity weakness is broad based with Germany’s PMI at 47.9 while France’s PMI was 44.4 in April.
The Bank of Japan’s (BoJ) new governor, Haruhiko Kuroda, announced a massive expansion of its quantitative easing program with the aim of shocking the economy out of its present deflationary state. The BoJ plans to double Japan’s monetary base by the end of 2014 by engaging in large scale asset purchases. The BoJ will be buying government securities up to 40 years in maturities with the aim of extending the bank’s portfolio duration from circa “three years at present to about seven years”. Accordingly the BoJ’s balance sheet will expand from ¥158 trillion (US$1.7 trillion) to ¥290 trillion (US$3 trillion) by end of 2014.The policy should see the yen continue to fall, even after the circa 26% fall already seen against the US dollar.
In China, economic growth moderated toward a (+7.5%) annual pace in line with government objectives. Excluding the booming housing sector which the government is specifically seeking to restrain, policy should remain supportive of growth. Underlying improvements across a range of retail sales, housing and financing data as well as steady growth in investment spending and the manufacturing PMIs suggests the economy is on a moderate recovery path. China’s HSBC/Markit flash PMI has eased in April to mostly reverse the gains made in March. A contraction in export orders by 1.9 points to 48.6 was particularly notable whilst the overall new orders index fell -1.6 to 51.7. Overall, a tougher export climate prevails relative to China’s domestic demand.
Australian consumers now look to be responding robustly to last year’s interest rates cuts as evidenced by the sharp surge in retail spending. April’s Reserve Bank of Australia (RBA) board meeting announced the official cash rate would remain on hold at 3.0% with an implied easing bias. In the meeting it was noted Australia’s banking system “remains in a relatively strong position” relative to peers in regions such as Europe. Australia’s inflation data was mild. However, modest consumer price inflation (CPI) results could suggest that another interest rate cut will not immediately occur. The RBA is likely to assess the Federal Budget (May 14) and investment intentions data (May 30) before considering whether the economy needs further stimulus Manufacturing activity contracted significantly in April as conditions weakened amid pressures such as a strong Australian dollar, intense import competition, high energy costs and weak local confidence.
While it was a bumpy ride in April international share markets rose. Assertive central bank actions from the Bank of Japan and positive corporate fundamentals saw International shares rise. The earnings reporting season in the United States began in the month. Of the 270 companies (S&P500) that have reported so far, 74% have exceeded expectations for profits. The Bank of Japan plans to double Japan’s monetary base by the end of 2014 by engaging in large scale asset purchases with the aim of shocking the economy out of a deflationary state. The MSCI World (ex-Australia) Accumulation Index, rose +2.7% in local currency terms and rose 4.2% in Australian dollar terms. The US S&P 500 Accumulation Index returned 1.9% in local currency terms. In the European region, the UK FTSE 100 Accumulation Index returned +2.9% in local currency terms. Japan’s Topix Accumulation Index returned +12.6% given supportive stimulus measures, which underpinned investor appetite for the shares of companies in Japan.
The Australian share market rose 4.5% in April. The domestic market outperformed as investors chased yield. Expectation for additional cuts to the official cash rate contributed to the rise in share prices. Given strong appetite for yield, the best performing sectors were Utilities (+6.3%), Telecommunications (+6.0%) and Financials (+5.0%). Materials and Energy fell in the month as weaker economic data in China hurt sentiment toward resource stocks. The best performing large-cap stocks during the month included Flight Centre (+13.6%), Harvey Norman (+11.7%) and Australia & New Zealand Banking Group (+11.6%). The worst performers included Atlas Iron (-24.8%), Perseus Mining (-24.5%) and OZ Minerals (-19.3%).
Listed Property Securities
The Australian real estate investment trust (A-REIT) market rose with the broader share market and given the appetite for yield theme strongly outperformed (up +8.2%) relative to the &P/ASX 200 Accumulation Index which rose by 4.5%. UBS Diversified was the best performing subsector (+8.9%). UBS Commercial was the worst performing subsector (+5.6%) yet still outperformed the broader share market.
Direct property saw more encouraging signs of retail spending. Encouragingly Australian retailers continued to evaluate their store portfolios, and foreign brands were a new source of demand for major city and regional shopping centres. This saw demand for quality prime assets remain strong from investors. Commercial leasing markets are still weak as many cities work through a slowdown in government, mining, and financial services demand for space. Demand for industrial investments remained robust due to the attractive yield, but a lack of stock for sale is limiting sales activity.
Bank bills fell in April. While the Reserve Bank of Australia (RBA) held the official cash rate at 3.0% the central bank comments suggested a bias toward easing. The three-month bank bill opened the month at 3.04% and fell by 10 basis points (bps) to 2.94%. The six-month bank bill opened at 3.09% and closed 21 bps lower at 2.88%.
Australian bond yields fell in the April. While the Reserve Bank of Australia (RBA) held the official cash rate at 3.0% the central bank comments suggested a bias toward easing with inflation remained within the target range. In addition, indicators surrounding the manufacturing sector sharply fell. Three-year government bonds opened the month at 2.88% and fell 30 basis points (bps) to end the month at 2.60%. Australian 10-year government bond yields started the month at 3.41% and fell by 30 bps to finish at 3.11%.
Government bond yields generally drifted lower through the month on softer economic data from the United States, China and Europe. The US 10-year government bond yield fell by 16 basis points (bps) in the month to1.67% from 1.83%. Britain’s 10 year government bond yields fell by 11 bps to 1.66% while German government bond yields fell by 9 bps to 1.20%. In contrast in Japan 10 year government bond yields rose by 2 bps to 0.59% given anticipated government bond purchasing. Corporate bonds benefited on the back of improving sentiment and positive corporate fundamentals with the Barclays Global Aggregate Credit (Hedged) in Australian dollars rising 1.6%.On a positive note, government bond yields in Italy and Spain fell given improved sentiment. This was helped by formation of a new Italian government under Enrico Lette, a moderate from the Democratic Party. The further fall in yields came despite Spain being granted another two years by the European Commission to reduce its budget deficit to 3% of gross domestic product (GDP), providing another sign Europe is relaxing its austerity obsession. Lower bond yields in Spain and Italy signalled that concerns surrounding the Eurozone have diminished in its intensity.
In April, the Australian dollar fell against most major currencies (as per the trade weighted index). The TWI closed the month at 78.0 (down 1.1% from 79.1). The official cash rate remained at 3.0% in the month. The Australian dollar initially rallied against most major currencies before falling back somewhat after benign inflation levels raised the probability of future rate cuts. Weaker than expected economic indicators in China also hurt sentiment toward the Australian dollar. The exception is the value of the Australian dollar relative to the Japanese yen, where aggressive monetary action from the Bank of Japan has seen a softening in the value of the yen. The Australian dollar closed the month at US$1.0349 (down 0.7% from US$1.0423) and ¥101.283 (up 4.1% from ¥97.2530).
Commentary provided by Dr Shane Oliver, Head of Investment Strategy & Chief Economist, AMP Capital Investors Limited (ABN 59 001 777 591) (AFSL 232497).