Economic Update March 2018

Within this month’s update, we share with you a snapshot of economic occurrences
both nationally and from around the globe.

Inflation Jitters

– United States (US) jobs data starts a correction
– Market rally hard on no news!
– Australia jobs data are mixed

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 your
Financial Adviser.

The Big Picture

We ended January on a slight sell-off, arguably because markets ran a little bit too hard at the start of the year. But come February 3rd there was one little number in the US jobs report that caused a stir.

Wage inflation came in at 2.9% – not big in itself, but a little higher than expected. That caused market participants to reprice bond yields and equities dived a little more.

A week later, all was forgiven. When the noise was stripped out of the data, markets rallied hard again. But then they sold off in the last couple of days of the month. The US got a second bite at the inflation cherry with the mid-February CPI read.

Both versions of the index beat by a fraction so market volatility started to fluctuate in normal territory. We had the local ASX 200 minimally overpriced in January, so it was no surprise
that our market didn’t fall as far as Wall Street. And it rebounded sharply!

Our labour force data seemed strong on face value. But full-time jobs growth plummeted, while part-time more than took up the slack. Unemployment is stuck in the mid 5% range.

China produced some stunning trade data. The commodity boom is far from over. China is also moving to ‘do a Putin’ by removing the restrictions on a president serving for an extended period. President Xi looks set to be around for at least another 5 – 10 years. Not bad for now but how will the next generation be introduced? Of course Australia and the UK have no limits on the tenure of a PM.

Stock market volatility certainly spiked in early February but it has already got back to close to the normal zone.

The fly-in-the-ointment for the next month is how the new US Fed Chairman, Jay Powell, handles himself. He faced his first grilling on Capitol Hill at the end of February.
Commonsense dictates he will try to help the market slowly adjust to any new scenario he
would like to preside over. He was quite upbeat on the strength of the US economy. He emphasised that this strength has improved since the December Fed meeting.
The market and the Fed were both pricing in three rate hikes for 2018. But that Powell
testimony has pushed up the probability of four rates to 34%.

As new data has come to hand – particularly on inflation – volatility may again spike. But it is our view that, at the end of the year, 2018 will be seen as having been good for equity markets.
Our Reserve Bank seems unlikely to do much for months – if not for the whole year and beyond.

It so happens that many high-profile analysts have called the latest US company reporting season (February) as “excellent” and the Australian season that is just ending as “quite good”.
With global growth converging to a stronger world economy, and US and Australian companies predicting a brighter future, 2018 looks likely to be quite a strong year for investors.

Asset Classes

Australian Equities

Our market was almost flat over the month but the Healthcare sector was particularly strong with CSL leading the way. The market finished February at 6,016 – which is well off the February low of 5,821.

We have the index priced fairly with above average capital gains expectations going forward.

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