April 2017 Monthly Commentary
(Update provided by Willis Towers Watson, legalsuper’s investment asset consultant)
The details of President Trump’s much anticipated tax plan were released in April and were broadly as expected. The U.S. economy grew at 0.7% in the first quarter of 2017, the weakest pace of growth in three years as consumer spending marginally increased and businesses invested less in inventories. Second to this the latest jobs report revealed that the US economy created far fewer jobs in March than the prior month, even as the unemployment rate fell. The Federal Reserve holds its meeting on interest rates in early May however the market does not expect a rate hike this time.
In the US, builder confidence in the market for newly built, single-family homes, measured by the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) fell to 68.0 in April from 71.0 in March. The Markit Manufacturing PMI for the US fell to 52.8 from 53.3 in March. This was the lowest reading since September 2016, as a slowdown in output and new business growth offset a slight rebound in job creation.
The euro and stock markets responded positively to the results of the first round of the French election. Centrist Macron won 24.0% of the vote and far right Le Pen won 21.3%. On May 7, these two candidates will face off in the second round vote to choose France’s next president, with Macron strongly favoured by pollsters and betting markets. The Eurozone’s core inflation reading increased to 1.2% year-on-year for April, the highest since June 2013. Headline CPI is expected to rise to 1.9% for the year to April. The Markit Eurozone Manufacturing PMI rose to a six-year high of 56.7 in April, from 56.2 in March. The Eurozone PMI Composite Output Index rose to 56.7 in April from 56.4 in March. It is the highest reading since April 2011 as both services and manufacturing rose faster, signalling a strong start to the second quarter. The Eurozone stock market returned 1.7% over the month based on the Euro Stoxx 50 index in local currency terms. On a one year basis, the same index returned 17.5% in local currency terms.
The Chinese manufacturing PMI as measured by Caixin Manufacturing PMI fell to 50.3 in April, from 51.2 in March, pointing to the weakest expansion in factory activity since September 2016. The Chinese RMB depreciated against the USD over the month by 0.1%, and the Chinese stock market generated a negative return of 2.1% (in local currency terms), as measured by the Shanghai Composite Index. Over the same period, the MSCI World ex Australia Accumulation Index returned 1.1% in local currency terms, and 3.6% in unhedged Australian dollar terms.
In Australia, the Reserve Bank maintained the cash rate at 1.5% at both its March and April meetings. Headline inflation rose to 2.1% in the March quarter putting it back in the RBA’s 2-3% target range (the first time since Q3 2014). Despite inflation being back in the target range, the RBA is expected to maintain cash rates at 1.5% and hold out to the second half of 2018 to raise rates. This is due to a number of economic indicators such as continuing low underlying inflation pressure at a time of high underemployment, record low wage growth, a high Australian dollar and the condition of the housing markets.