Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.
Markets remaining bullish!
Global recession fears not abating
US Fed on hold for 2019
RBA acknowledges rates may go down in Australia
We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact us/
The Big Picture
After two very strong months on global stock markets, which completed the recovery from the correction in the December quarter of 2018, markets were flat to positive in March. That behaviour was inevitable but the narrative surrounding the end of the recovery was somewhat of an over-reaction, in our opinion.
The US Federal Reserve (Fed) last raised cash rates in December 2018 and then forecast two more hikes for 2019. At the March 2019 meeting, the Fed signalled no more hikes in 2019 and the markets started pricing in the possibility of cuts. There was heightened talk about a global slow-down causing this change in stance.
Possibly precipitated by the Fed policy, ‘the US yield curve became inverted’ on March 23rd. Usually, the short-term interest rate – such as the 90-day-bill rate – is below the rate at the long end – say the 10- year bond rate. When the short rate is above the long rate, the so-called yield curve is said to be inverted.
Inverted yield curves are rare and are often associated with an impending recession. The last time the US yield curve was inverted was in mid- 2006 before the GFC but we think the 2019 version is different.
An inverted yield curve is usually caused by the central bank jacking up its short-term rate while the interest rates on longer term instruments such as Government bonds moves less because they are tied to inflation expectations. That’s what happened in 2006 but not in 2019.
The current US cash rate is about half of what it was in 2006. This time, it was the interest rate on longer term instruments which fell on the news that the Fed had stopped increasing the cash rate as inflation was not, in their view, a current issue!
No one is suggesting that there is a causal link between yield curve inversion and recession. Rather, both are usually caused by common factors. At the end of March, the final estimate for US economic growth in 2018 came in at 2.9% which is comfortably above even moderate levels.
At home, our central bank, the RBA, kept the official cash rate on hold. But the economic growth figure for the December quarter of 2018 (Q4) came in at only +0.2% only days after the RBA interest rate announcement. The RBA’s expectation was for +0.6% for Q4 and 3.0% for 2019. The market too predicted +0.6% for Q4 a few days before the data release but cut that forecast to +0.3% the day before. RBA Governor, Philip Lowe, stated that “it’s hard to see a case for a rate hike this year”.
The situation was not helped when the US jobs data was particularly soft. Only 20,000 new jobs were reported in the month of February but that month’s employment was affected by the partial government shutdown caused by Congress’ failure to agree on spending. The jobs’ report was delayed in its release because the data collection agency was also affected by the shutdown. This data announcement might well be revised upwards. The new reported unemployment rate was down to 3.8% from 4.0% and wages growth came in at 4.3% which is the highest since the GFC. Consequently, we are not in the naysayer’s camp as these economic data announcements are continuing to confirm robust growth in the US.
Naturally China played a big role in shaping the broader views of economic prospects. The official China growth forecast for 2019 is in the range of 6.0% p.a. to 6.5% p.a., a fraction down on the 2018 outcome. But in an attempt to stimulate the economy Chinese authorities have cut the (GST-equivalent) value added tax (VAT) rate to 13% from 16%.
The China-US trade talks resumed at the end of March. There appears to be widespread hope of some sort of resolution to the impasse – but just not yet.
The Brexit negotiations are now outdoing even the best of the Monty Python sketches. The UK PM took the same bill back to the UK parliament for a third vote after it had failed twice. She had offered to stand aside if that last vote had been successful and stay if it failed!
We still think the fundamentals of the ASX 200 and Wall Street are strong but all eyes will be on the latter’s Q1 reporting season that starts in a couple of weeks.