March 2018 Quarterly Commentary
(Update provided by Willis Towers Watson, legalsuper’s investment asset consultant)
■ The Reserve Bank of Australia (RBA) left the cash rate unchanged at 1.5% throughout the quarter
■ The Australian seasonally adjusted unemployment rate was recorded at 5.6% for February
■ The Australian dollar (AUD) depreciated relative to the US dollar (USD), closing at 76.65 US cents at the end of March 2018 (down from 78.00 US cents at the end of December 2017)
The RBA Board maintained the official cash rate at 1.5% throughout the March quarter. The minutes of the March meeting noted slight growth in domestic consumption despite weaker retail sales, particularly among smaller retailers. The RBA Board also noted weaker Australian exports, however, much of this was due to cyclical reasons which are likely to reverse over the remainder of the year.
Australian GDP growth for the year to 31 December 2017 was 2.4%, falling slightly short of consensus estimates of 2.5%. Growth was driven by household consumption (0.6%), government spending (0.3%), public investment (0.2%) and private investment in machinery and equipment (0.1%). Detractors from growth included investment in non-dwelling construction (-0.5%), investment in dwellings (-0.1%) and net trade (-0.5%). Exports of goods and services dropped by 1.7% and 1.9%, respectively. Imports of goods increased by 1.6% and imports of services dropped 2.7%.
Data released during the March quarter provided mixed indications about the strength of the Australian economy. The Australian Manufacturing PMI increased over the quarter to a record of 63.1 in March. Headline inflation, as measured by CPI, rose 1.9% through the year to the December quarter, below the market consensus of 2.0%. Business confidence, as measured by the NAB Business Confidence survey, decreased to 7 in March 2018 from 10 in December 2017. Consumer sentiment, as measured by the Westpac Melbourne Institute Consumer Sentiment Index fell by 2.3% to 102.7 in February. This was from a reading of 105.1 in January (NB a result above 100 reflects a higher number of optimists relative to pessimists).
The Australian seasonally adjusted unemployment rate to February 2018 rose slightly to 5.6% from 5.5% the month prior, but is expected to fall to 5.3% for March. In February, 17,500 jobs were added to the economy, however, the number of unemployed increased by 8,900. Above average growth in employment looks likely over the coming months given positive business survey measures of hiring intentions and job advertisements. Likewise, the labour-force participation rate remained high. Wages growth, however, remained low with the wage price index increasing by just 0.6% in the December quarter, bringing year-on-year growth to 2.1% (seasonally adjusted).
Housing prices continued to slow in both Sydney and Melbourne as auction clearance rates declined to around average levels in both cities. Business investment (based largely on non-residential construction by the private sector) is expected to rise from the December quarter and capacity utilisation expected to trend higher.
The AUD depreciated against the USD over the quarter from 78.00 US cents at December end to 76.65 US cents at March end. The Australian dollar also depreciated against the Chinese yuan and currencies of its other major trading partners over the quarter. The Trade Weighted Index closed the quarter at 62.3, down from 64.9 at December end.
The Australian share market, as measured by the S&P/ASX 300 Accumulation Index, lost 3.8% in the March quarter, driven largely by a turbulent U.S. stock market. All sectors were down for the quarter, with Telecoms and Financials the worst performing at -6.2% and -5.8%, respectively.
Domestic bond yields declined over the three month period with Australian Government 10-year bond yields ending the quarter at 2.60%, down 0.03% from the previous quarter end. The Bloomberg AusBond Composite index, returned 0.9% for the quarter.
The Australian listed property sector fell over the quarter with the S&P/ASX 300 A-REIT Index losing 6.2%.
■ The US Federal Reserve Board increased the Federal Funds target rate range by 25 basis points to 1.50%-1.75% at its March meeting
■ Global equity markets as measured by the MSCI World ex-Australia Index (unhedged, AUD) returned
0.8% over the quarter. On an AUD hedged basis, global equities returned -2.3%
■ Global bond yields closed the quarter slightly higher
Global equity markets finished lower over the first quarter with the Trump administration’s trade tariffs weighing on returns. The US Federal Reserve Board lifted rates by 25 basis points (bps) in March which marks the first time in over 15 years the official US cash rate is above Australia’s official cash rate. In the U.S., real GDP is expected to be 2.6% for the first quarter and the number of rate hikes projected in 2019 has been increased to three in total.
The US unemployment rate remained at 4.1% in March, the level it finished at in December 2017. Unemployment decreased by 121,000 to 6.59 million and employment fell 37,000 to 115.18 million. The labour force participation rate dropped to 62.9% in March from a five month high of 63.0% the month prior. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) fell to 70 in March 2018, from 74 in December (a number over 50 indicates more builders view sales conditions as good than poor). Activity in the US manufacturing sector continued to improve, with the US Markit Manufacturing PMI increasing to a seasonally adjusted rate of 55.6 in March from 55.1 in December. Consumer sentiment, as measured by the University of Michigan Consumer Sentiment Index, was 101.4 in March increasing over the quarter from 95.9 recorded in December. Year-on-year US headline inflation increased 2.4% in Marchwith annual core inflation expected to be 2.0% at March quarter end.
In the Euro area, the seasonally-adjusted unemployment rate is forecast to be 8.5% at the end of March, down from 8.6% at the end of the December quarter. The Markit Eurozone Manufacturing PMI increased to 56.6 in March, down from the December reading of 60.6 - the weakest pace of expansion in the manufacturing sector since last July. Euro area headline annual inflation is expected to remain at 1.4% (year-on-year) in March 2018, the same level as the December quarter. European core inflation (which excludes prices of volatile items such as food and energy) is expected to be 1.3% at March end, up from 1.1% at the previous quarter’s end, remaining below the long-term average of 1.5%.
The Chinese quarterly GDP growth rate is expected to come in at 1.4% for March end, slightly below the 1.6% growth rate realised over the December quarter. The China Caixin Manufacturing PMI came in at 51.0 at quarter end, below market expectations of 51.8.
At its March meeting, the Bank of Japan (BoJ) left its interest rate unchanged at -0.1%. Policymakers maintained their ~0% target on 10 year government bonds and purchases will be made at more or less the current pace of approximately ¥80 trillion per annum. The BoJ noted the economy is expanding moderately with exports increasing and business fixed investment, corporate profits, and business sentiment improving. The year-on-year rate of change in CPI is likely to move up towards 2% on the back of an improved output gap and better medium to long term inflation expectations. The unemployment rate is expected to be 2.4% at March end, down from the December reading of 2.7%. The Markit/Nikkei Final Japan Manufacturing PMI came in at 53.1 for the March quarter, down from 54.0 in December.
Global equities were weaker over the quarter with the MSCI World ex-Australia Accumulation Index (hedged to AUD) returning -2.3%, equating to a 0.8% return in unhedged terms. Returns regionally (AUD unhedged) were mixed with positive returns from the MSCI Emerging Markets Index (3.1%), MSCI Japan Index (2.5%), MSCI AC Asia Pacific ex. Japan (2.3%), MSCI North America (0.5%) and the MSCI Europe ex. U.K. Index (0.4%). Negative returns were had by MSCI U.K Index (-2.3%).
The UK 10-year government bond yield increased from 1.19% to 1.35% at the March quarter end, and the German 10-year bond yield increased from 0.43% at December end to 0.50%. The US 10-year government bond yield increased from 2.41% to 2.74% over the quarter.
Global listed property fell 5.9% for the quarter as measured by the FTSE EPRA/NAREIT Developed ex-Australia Rental Index (AUD hedged).