Monthly Financial Markets Update – May, 2015

The US economy recorded slower jobs growth in April while GDP growth slowed to a crawl. This means the US Federal Reserve may delay raising interest rates until September. In Australia, jobs growth was higher than expected while core inflation sits comfortably in the middle of the Reserve Bank’s target range.

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Welcome to our May monthly market update.

So what happened in the major economies in April?

During April we saw weaker US economic data. After a recent run of strong employment growth, March non-farm payroll figures were significantly weaker than expected. Only 126,000 jobs were created. There were also downward revisions totalling 69,000 jobs to employment growth numbers reported for the previous two months. In addition, other measures of activity, such as durable goods orders and new home sales, were disappointing. GDP growth slowed to a crawl, rising just 0.2% annualised in the first quarter of 2015, due to weak gains in exports, consumer spending and investment. Although the US Federal Reserve recently said it viewed the growth slowdown as reflecting transitory factors, we expect the Fed may delay lifting interest rates until September.

In Europe, the recent focus remains on the protracted negotiations with Greece over its government debt burden. However, the tone of recent commentary appears more hopeful.

In Germany, measures of confidence, such as the ZEW economic sentiment index and the IFO business climate index, have recently picked up, pointing to stronger business optimism assisted by lower energy costs and a weaker Euro.

In China, GDP rose 7% year-on-year in the March quarter, which was in line with expectations and the Government’s 2015 growth target. However, annual growth was less than the 7.3% recorded in the previous quarter and the quarterly growth rate of 1.3% was the weakest result since 2011. To try to boost lending and growth, the People’s Bank of China reduced the reserve requirement ratio for Chinese banks from 19.5% to 18.5%, the largest reserve cut since 2008.

 What about the Australian economy and share market?

 The Australian economy hasn’t been too bad in recent months. Employment growth was higher-than-expected and a solid 37,700 jobs were created in March, which helped reduce the unemployment rate to 6.1% from 6.2%.

Core Australian inflation, which attempts to strip out more volatile items, came in at 2.4% year-on-year in the March quarter, a level which sits in the middle of the RBA’s 2% to 3% target range.

 So, how did global and local financial markets perform in April?

 Global equities returned 1.1% in April, with Chinese stocks rising 18.5% for the month while European equity markets were pulled lower as the Euro recovered against the US Dollar. Government bond yields in major markets rose in April with yields on 10-year German government bonds doubling to 0.36% per annum.

 Australian residential property

Australian capital city dwelling prices rose 0.8% in April with gains in every capital except Canberra where prices fell 1.5% over the month. Over the past year, capital city prices are 7.9% higher, largely as a result of the strong gains in Sydney (14.5%) followed by Melbourne (6.9%), however, outside these capital cities, price growth has been more moderate, ranging from -1.6% to +2.2%.

Since the Reserve Bank of Australia cut the official cash rate in February, auction clearance rates are running at or near record levels of around 80%. Sydney clearance rates were 87.3% last week and this was the 13th week in a row that Sydney has seen clearance above 80%. Despite cutting interest rates again by 25 basis points in May, the RBA remains unconcerned about the prospects of stimulating a housing ‘bubble’, noting that it is Sydney where most of the price action has been concentrated.