Economic Update – October 2019
by Infocus Author
Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.
Global share market recovers from August dip
– Australian property market appears to be stabilising
– US Fed cuts rate in split decision
– The RBA cuts again by 0.25%
– Europe returns to monetary stimulus
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 our team.
The Big Picture
Amid largely anecdotal reports of an improving Australian property market, the private data service, Corelogic, produced hard evidence that September witnessed quite strong price growth in both Sydney and Melbourne.
While the June and July interest rate cuts from the Reserve Bank of Australia (RBA) may have been a contributory factor to house price increases, the regulator also slackened certain lending criteria. Moreover, Australian property prices typically have a strong surge every five or ten years followed by an extended period of flat or slightly falling prices. Perhaps recent price action is the initiation of the recovery after two years of declining prices.
Corelogic’s data release occurred the day before the October 1st RBA board meeting. The collective wisdom of analysts and economists was that the RBA would cut its rate to 0.75% which it did. Of course, the RBA also has its eye on our labour market, overseas interest rates and our economic growth.
Australia’s second quarter growth came in at the start of September at a weak 0.5% for the quarter or 1.4% for the year. On the other hand, the jobs market remains reasonably strong.
However, with the US and the EU cutting rates in September, the RBA is somewhat forced to keep in step to try to stop our currency appreciating.
The US Federal Reserve (the Fed) cut rates in mid-September but in a split decision. Three members voted against the cut and only seven of 17 members expect a further cut this year.
The mood around US rates materially changed over September. Gone are those predicting a near term recession based on the difference between short and long US rates. It seems that just one more strong retail sales data release of +0.4% for the month was enough to swing opinions. We were never in that near term recession camp.
Although there should always be a nonzero probability expectation of a recession, we see no current data sufficient to raise that probability to a significant percentage.
The US jobs data were again strong with wages growth at last solid at 3.2% and the unemployment rate remaining at a near 50-year low. The consumer is underpinning the US economy.
The European Central Bank (ECB) not only cut its rate by 10 bps (0.1% point) to 0.5% but it also reintroduced quantitative easing (QE) to the tune of $20bn per month for as long as is necessary. With the new ECB president, Christine Lagarde, taking over the reins in November, she is now locked in to a strong monetary stimulus policy.
The latest EU economic growth was only +0.2% for the June quarter. The ECB forecast for the year ahead is only +1.0%.
China has just started its Golden Week celebrations as it marks the 70th anniversary of the People’s Republic of China with its biggest parade to date.
Much of the standard China data monthly releases just missed expectations during September but that month ended with the Purchasing Manager’s Index (PMI) for manufacturing beating expectations at 49.8 – which is only just short of the ‘50’ that divides contraction from expansion. The services PMI at 53.7 is well in expansionary territory.
While stock markets generally turned the corner after a volatile August, the US Democrats have started an impeachment investigation against President Trump. Since an impeachment would need a two-thirds majority in the Republican-held Senate, it is a most unlikely event. And the markets are seemingly immune from the continuing anti-Trump campaign.
The ASX 200 index grew by around 2% over September and volatility was quite low. Financials stocks that include the big four banks had a particularly strong month.
We have calculated that company earnings revisions have resulted in a slight softening in our predicted capital gains over the next 12 months to about the historical average rate of 5%.