Monthly economic update with MLC, April 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 continued strength in equity markets, Australian dollar weakness and continuing trade tensions between the US and China.

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: It was a solid performance out of global share markets in April, particularly out of Europe, China and the US, all up over three per cent. What was the reason behind that?

Bob Cunneen: Yes it was an extraordinary run. So Wall Street made record highs, Standard Poor’s Index was up four per cent for April. A couple of factors in play that were positive. Markets have taken the view that there will be a resolution of the US China trade dispute. And we’re seeing in recent days that there’s a big question mark about that, with President Trump talking about raising tariffs. So April looks like a thing of the past at the moment.

The other positive factor was some pretty solid American economic data. So jobs growth is very strong, unemployment rate below four per cent. But inflation pressures are quite mild, which indicates that the Federal Reserve, the American central bank will keep interest rates on hold. We also saw some very promising data out of China. So China stable, quarter one GDP growth, industrial production and retail sales have all improved, Chinese central bank providing stimulus. These are all encouraging signs, which the market in April took as a big positive.

Sinead Rafferty: What about in Australia, we saw some positive growth in terms of the Australian share market, particularly at a consumer staples and over the IT sector, which performed especially well. What was the reason behind those two sectors?

Bob Cunneen: In the case of information technology, that was largely a catch up to the US market. In the case of the consumer staples sector, in particular in Australia, plus seven per cent gain. And that largely reflected the view that the Federal Budget announcement of tax cuts, for lower to middle income earners, would be very supportive of retail spending. So what you saw is Coles Group Limited (ASX:COL) share price was up about six per cent. Woolworths Group Limited (ASX:WOW) up about 4.5 per cent in April. So they’ve taken that as a key positive. Overall the Australian share market quite muted, 2.5 per cent gain is quite reasonable. But in comparison to the four per cent gain for the US market, it was quite modest.

Sinead Rafferty: What about global government bond yields, they were up mildly in the last couple of weeks. What was the reason behind that, given the fact that we’re not actually expecting any rate hikes globally?

Bob Cunneen: Well that’s quite interesting, because if you think about the last six months, in particular final quarter of 2018 when share markets were weakening, global bond yields were falling dramatically. And now we’ve got the reverse of the situation, where share markets are rising, economic activity or the global purchasing manager surveys are now turning more promising. So bond yields are rising. Although in terms of central banks, if we look at America or Europe or Japan, they are likely to keep interest rates on hold. So no change there, but bond yields are reacting to the positive share market, plus the more positive economic data.

Sinead Rafferty: What about the Australian dollar Bob, it’s fallen back in recent weeks, now below 70 cents against the US dollar. What’s the reason behind that, are we considering further cuts in Australia in terms of what the Reserve Bank might do?

Bob Cunneen: Exactly. So what we saw at the March quarter, inflation result was quite modest at 1.3 per cent on an annual basis. So that indicates that the Reserve Bank may cut interest rates. We’ve also had some very weak economic activity data. So if you looked at building approvals, so housing construction is weak, car sales are weak. While the labour market is holding up at the moment with solid jobs growth, that’s probably the only key positive in the Australian economy at the moment. So there is considerable pressure on the Reserve Bank to contemplate cutting interest rates.

Sinead Rafferty: Thanks for your time Bob.

Bob Cunneen: Thank you.

Sinead Rafferty: And thank you for joining us.