28 August 2018
July 2018 in Review
- The RBA maintained its holding position, leaving the cash rate at 1.50%, as household debt and lack of wage growth remain a concern.
- The business sector is enjoying more favourable conditions, particularly the construction, manufacturing and business services industries.
- Public sector investment and infrastructure has shown continued strength, with public sector capital expenditure amounting to around $90 billion over the past year. This equates to approximately 5.5% of the economy – almost the same size as the dwelling investment sector.
- Tightening in lending conditions as a result of the Royal Commission into Financial Services poses a downside risk to the economy, as it may constrain households.
- The possibility of a sharp decline in housing prices also poses a challenge to growth. Prices for houses in Sydney have been falling for past nine months, with auction clearance rates in the low 60% range.
- The labour market continues to tighten, adding 50,900 jobs in June. Pleasingly, this included a solid increase in full time positions. Over the past year, the trend of adding more part time jobs continues, with full time jobs added growing at 2.5% compared to part time growing at 5.2%. The headline unemployment rate was steady at 5.4%.
- US GDP for the June quarter came in at 4.1% annualised according to the first estimate reading, which was in line with consensus expectations but based on factors that could prove temporary, including the impact of income and company tax cuts. This was the fastest the US economy has grown since September 2014.
- The Fed left rates unchanged at the July/August meeting, citing a strengthening labour market and economic activity rising at a strong rate, with signs that the household sector is regaining confidence as reasoning behind the decision.
- The US CPI rose to 2.9% on an annual basis in June, from 2.8% in May. The Core PCE Index, which is the number that the Fed uses as its preferred measure, moved from 2.0% to 1.9% year-on-year. Overall, the data still indicated a gradual but sustained rise in inflation.
- Over in Europe, economic growth across the euro member countries was 2.1% year on year, and 0.3% in the June quarter according to the preliminary estimates – down from 2.5% in the previous quarter. The Eurozone economy is yet to show signs of sustained growth, despite ongoing structural reform and improved labour market flexibility.
- Euro inflation rose to 2.1% in July, driven by a 9.4% increase in energy prices. Workers are finally seeing signs of meaningful wages growth are years of economic recovery, with official data showing a 2.0% rise in the March quarter.
- The Australian market underperformed versus the global market in July, with S&P/ASX 300 Index returning 1.3%. The large cap end of the market was the strongest performer, with the S&P/ASX 50 increasing 1.6%, compared to the S&P/ASX Small Ordinaries falling 1.0% over the month.
- The best performing sectors were Telecoms (+7.6%) and Industrials (+3.2%), whilst Utilities and IT were the largest drags to the benchmark, falling 1.4% and 1.1% respectively.
- At a stock level, the largest positive contributors were ANZ, CBA and BHP, returning 4.2%, 2.6% and 3.1% respectively. IAG, RIO and Evolution Mining were the largest detractors, falling 5.7%, 2.3% and 20.4% respectively.
- The MSCI World Index ex Australia rose a solid 3.2% in hedged terms, and 2.5% unhedged, as the AUD appreciated against most major currencies. The strongest performing sectors globally were Healthcare (+5.5%) and Industrials (+4.1%), while Real Estate (+0.5%) and Consumer Discretionary (+0.6%) were the main detractors.
- US indices were higher on the back of a broadly positive round of earnings announcements, with Apple surging to an historic $1 trillion market cap after announcing higher than expected revenue and EPS growth.
- The Eurozone delivered solid returns in July, with the German market up 4.1%, France up 3.5% and the UK up 1.5%.
- China’s CSI 300 Index rose a modest 1.0%, after falling 7.0% in June. Hong Kong’s market fell 0.5% whilst Japan rose 1.1%.
- Bond markets were fairly subdued in July as central banks left rates unchanged and trade-related fears were pushed to the side as the markets focused on earnings and positive economic data.
- Local bonds returned 0.2% in July, with corporate debt rising 0.2% and government debt returning just over 0.1%. Australian credit was the best performer, returning 0.3% over the month.
- Global bond markets were all slightly negative over July as yields rose across all major regions, including Germany, US, Japan and the UK. The Barclays Global Aggregate Index was flat over the month in AUD hedged terms, with US 10-year bonds holding just below 3.0%.
- Commodities came under pressure in July as the rally in oil prices was disrupted by trade fears, plus the price of base metals continued to slide. The S&P GSCI Commodity Total return Index fell 4.1% over the month.
- The spot price of oil fell 6.3% to US$74.16 per barrel, while the Brent oil price was down 5.7%.
- Base metals fell, with Lead (-10.6%) the largest detractor, followed by Zinc (-8.0%), Nickel (-5.8%) and copper (-4.9%). Tin bucked the trend , gaining 1.7%.
- Gold continued to slide through July, falling 2.3%, while the iron ore price rose 2.2%.