Monthly economic update with MLC, August 2018

Funds Management

by Clive Tompkins

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MLC Senior Economist Bob Cunneen discusses the Reserve Bank's decision to put rates on hold and the latest market moves with NAB Asset Management Portfolio Specialist Sinead Rafferty.

Sinead Rafferty:
Welcome to this month’s economic update, I’m Sinead Rafferty, Portfolio Specialist at NAB Asset Management and I’m joined by our Senior Economist, Bob Cunneen. Welcome Bob.

Bob Cunneen: Thanks Sinead.

Sinead Rafferty: We saw the Reserve Bank keep interest rates on hold in July, which now marks a two-year anniversary of no change to interest rates. What would it take for the Reserve Bank to make a change?

Bob Cunneen: The Reserve Bank’s held this cash rate at 1.5 per cent for a long time, as you note. Of the view that keeping interest rates low will support the Australian economy, in terms of employment, economic growth and will progressively raise inflation. And there are signs that the Australian economy is moving in that right direction, with stronger growth and inflation pressures picking up. But the Reserve Bank hasn’t met its target in terms of inflation. So from their perspective, they need to keep interest rates low. So it’s likely to be maintained. So we’re looking at 2019 at best, for the first stage where the Reserve Bank would contemplate raising interest rates.

Sinead Rafferty: What we did see in July was quite a solid performance for global markets, particularly the US, which was up over 3.5 per cent. Did that surprise you given the trade tensions?

Bob Cunneen: It does surprise us in the sense that trade is a long term negative, for both the American economy as well as the global economy. Because it damages economic activity and it lowers employment and raises inflation, because tariffs raises import prices. From the perspective of the American economy at the moment, what’s driving Wall Street is basically a strong corporate profit story. So what we’re seeing is corporate profits growing, plus 20 per cent over the past year, in terms of the June quarter.

We’re also seeing very solid economic activity in the United States. So unemployment is down below four per cent, economic growth is above four per cent, on an annualised basis. So these are very positive numbers and for now, they support Wall Street.

Sinead Rafferty: How’s the Chinese equity market performed over the month of July?

Bob Cunneen: The Chinese share market was down minus three per cent, in terms of the MSCI China index. So the Chinese share market at the moment is struggling. Now there are two key issues with the Chinese share market. Firstly the trade war, so China has a key export market in America that is causing some trade tension, by raising tariffs on Chinese imports. And the second aspect is the Chinese economy. So there are signs of a slowdown in the Chinese economy, in terms of industrial production and retail spending.

We’re also getting signs that the tightening in financial conditions that we’ve seen over the past year, so trying to restrain credit growth in China, has impacted Chinese economic activity and corporate profits. So from that point of view, the Chinese share market is worrying about the global risks with trade. It’s also worrying about the Chinese economy.

Sinead Rafferty: Is it fair to say that the trade tension is implicating what the Government in China can actually do, to reduce this debt burden?

Bob Cunneen: The Chinese Government faces a dilemma at the moment. It needs to support the economy in terms of activity, by providing easy credit. But the risk by doing so is that it extends the credit problems in China, with the build up in debt. So it’s a bit of a dilemma between supporting growth and China’s long-term financial stability. And it’s a very precarious path that the Chinese Government faces.

Sinead Rafferty: Finally Bob. How has the Australian share market performed?

Bob Cunneen: The Australian share market in July delivered a mild positive return of 1.3 per cent. Some of the sectors did obviously better. Telecommunications rebounded after some weakness earlier this year, so they were up 7.9 per cent for the sector itself. We also saw a very strong industrial performance, up three per cent. Against that, information technology and utilities sector slightly disappointed, down about one per cent. But all things considered, the Australian share market is doing reasonably well.

Sinead Rafferty: Thanks for your time Bob and thank you for joining us. If you’d like further information, it’s available on the website where you launch this video.