The global economy continued its broad based recovery in March. While a chief concern among economists and central bankers is controlling inflation, it is not currently posing a problem. In March oil supply issues in Iran and Nigeria continued and led to a continuing increase in oil prices. For the month of March, the MSCI World ex Australia Index (hedged into $A) rose 2.7%. The MSCI World ex Australia Index (unhedged) rose 6.6% over the same period and outperformed its hedged counterpart, which was a result of the Australian dollar trading down against the US dollar, the Japanese Yen and the Trade Weighted Index.
The Australian share market reached a record high in March, topping the 5,000 level for the first time. However GDP growth in the December quarter was slow at just 0.5% (or 2.7% year on year). This was despite strength in domestic demand which is now fuelled by strong business investment. Inflation is steady with the latest CPI (ex petrol and fresh fruit and vegetables) being 2.3%. It appears that the housing cycle is close to bottoming - building approvals were strong in February and housing finance and home sales data were strong. The January trade deficit was worse than expected at A$2.7 billion. This was influenced by a $900 million drop in mining exports which was affected by poor weather conditions in Western Australia. The National Australia Bank’s February business survey showed a rise in consumer confidence. Within the Australian Market, the S&P/ASX 200 Accumulation Index returned 4.7% in March, mostly due to increased merger and acquisition activity and ongoing strength in resource stocks. Fuelled by strong performances from gold stocks after the gold price hit a 25-year high, Materials (up 12.3%) was the strongest performing sector. Also performing strongly was Energy (up 10.2%). Telecommunications (down 2.4%) and Utilities (down 1.7%) were the worst performing sectors.
The global economy generally performed well and showed signs of rebalancing in March with strong growth in Japan and Europe relative to the US. Inflation in the US was steady with the Consumer Price Index within control ranges and business surveys pointing to an easing of cost and price pressures. However one major global investment bank has warned US unemployment has fallen to the point (the high 4 percents) where inflation always spirals. |
Other data from the US was stable with the Institute of Supply Management’s business conditions surveys increasing slightly. The European Central Bank increased the key European short-term interest rate from 2.25% to 2.5%. Euro-zone inflation rose 2.2% year-on-year in March, consistent with future interest rate tightening. Despite this possibility, German and European economic growth expectations remain at healthy levels. The Bank of Japan announced its interest rates will increase from zero but it is unlikely this will happen until the September quarter. Other economic data from Japan was strong, for instance retail sales and industrial production increased, the labour market remains strong and underlying inflation was better than expected at 0.5% for the year to January. Strong growth in China is continuing, with sturdy results in industrial production, retail sales and fixed asset investment over the January/February (Lunar New Year affected) period. A further positive result was a low inflation rate of 1.4% for the year. Consistent with maintaining balanced growth, government policy aims to enhance rural spending power and consumer spending.
The February recovery in Australian fixed interest was reversed in March with bond yields reaching new highs. The UBSA All Maturities Bond Index returned 0.11% for the month. This was driven by global influences as domestically the RBA gave no indication of a future change in interest rates. The US Federal Reserve further raised the official Fed Funds rate by 25 basis points to 4.75% and indicated rates may further rise in the future. Also contributing to an increase in global bond yields was stronger global economic data during the month.
The Australian listed property sector weakened in March with the S&P/ASX 200 Property Accumulation Index falling 0.5%. Key influences on market performance were speculation of merger and acquisition activity and a weaker Australian dollar. The unlisted property market continued to improve, with strong space demand continuing in many markets, particularly in Perth, Brisbane and Sydney.
Please note that this economic commentary does not constitute advice. |
