Monthly economic update with MLC, February 2019

Funds Management

by Clive Tompkins

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MLC Senior Economist Bob Cunneen speaks to NAB Asset Management Portfolio Specialist Sinead Rafferty about global share market strength, Australian dollar weakness and the outlook for local interest rates.

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

Bob Cunneen: Thanks Sinead.

Sinead Rafferty: Bob we saw another strong performance out of global markets in February. Was the primary driver for that the rhetoric that’s come out of the US/China trade talks?

Bob Cunneen: Yes it was. So global share markets were up about three per cent for February, which is very encouraging. And there are a couple of reasons behind it, but mainly it was talk about the trade dispute being resolved. So we saw signs from both President Trump that he is close to an agreement with China. We also saw a delay in raising tariffs. So the March 1st deadline has been delayed further. So that indicates we’re closer to a resolution. So that was a key positive.

The other positives for the global share market, the Federal Reserve, the American Central Bank indicated that interest rates were on hold. They would be patient about raising interest rates any further, given what they saw in terms of muted inflation pressures in America, in particular. And the other positive was that the corporate earnings reports for the December quarter, in America were very positive, up 13 per cent for the year.

Sinead Rafferty: Another market that performed particularly well in February was Australia, so up over five per cent. What was the reason for that?

Bob Cunneen: A couple of factors behind that. Firstly, we saw very strong commodity prices, so iron ore was up 15 per cent, copper was up six per cent. So the material sector, or the resources sector was up about eight per cent, for February itself. The other factor was we saw from the Reserve Bank’s point of view, a view that interest rates are now on hold. They saw the risk to the economy as very evenly balanced. So that’s very encouraging for the share market, from that point of view. But also our share market benefited from the global rally, in particular.

Sinead Rafferty: You’ve mentioned that the tightening bias that the Reserve Bank previously had, is now more of a neutral. And what’s the market pricing in?

Bob Cunneen: The market is actually pricing in that the Reserve Bank will cut interest rates, towards the end of this year. Which is a bit of a surprise, because the Reserve Bank’s rhetoric is that these risks on the housing market to the downside, against a very strong labour market at the moment, is very much even probability of a rate move. So the market’s probably got a little bit ahead of itself, it’s probably too ambitious on the RBA rate cut call. But if the inflation profile looks quite mild in Australia and if the economy’s quite soft, in terms of GDP growth, then there’s still a potential for that.

Sinead Rafferty: So a lot of the data is still pretty mixed. Is that fair to say?

Bob Cunneen: Yes it is. It’s very difficult to get a read on the Australian economy at the moment, because we have an environment where we have very mixed signals. The labour market has surprised on the upside, whereas the housing market is surprising on the downside.

Sinead Rafferty: Thanks for your time Bob.

Bob Cunneen: Thanks Sinead.