Bond markets have been supported by some market-friendly data and while Fed speakers were again mixed, it was the more dovish remarks that captured attention.
Australia & the World on two pages – October 2013
After a period where the data showed accelerating growth in the big advanced economies, the latest numbers have been more mixed. Although an upturn is still under way, the pace of industrial growth and business sentiment in some big advanced economies has stopped improving.
Global: After a period where the data showed accelerating growth in the big advanced economies, the latest numbers have been more mixed. Although an upturn is still under way, the pace of industrial growth and business sentiment in some big advanced economies has stopped improving. Trends in the emerging market economies have been mixed with Chinese growth showing signs of stabilising, India remaining weak and signs of a very modest improvement across emerging Asia and Latin America. Global growth forecasts remain at 3% this year and 3½% in both 2014 and 2015. We are assuming that US political uncertainties over its government shut-down and debt ceiling do not have a marked impact on its rate of economic growth – this assumption will clearly need to be carefully monitored as a worse case scenario would have significant global ramifications for both growth and especially financial markets.
- The US Federal Reserve surprised markets by not announcing the start of asset purchase tapering and that boosted share prices. We expect the Fed to announce in December that it will gradually cut back on its asset buying but the US Fed funds interest rate is only expected to start rising in H2 2015. Central banks in the other big advanced economies are not expected to lift policy rates for a long time but the Reserve Bank of New Zealand may begin lifting its cash rate in March. US 10 year bond yields, which had risen from 1.7% in April to 2.9% in early September, moderated to 2.6% by the end of the month. As global bond markets have been moving in parallel with US yields, this shift in the US market fed into other nation’s bond markets and their yields fell too. Commodity markets have continued their downward trend with the Economist and CRB falling through the last month.
- Global growth remains only moderate and many productive resources still lie idle in the wake of the deep recession of 2008/09. World export volumes were up by only 1½% yoy in July while growth in industrial production was around 1¾% yoy, both rates well below their long-term trend. Global GDP is, however, growing more rapidly than either exports or industrial output, reflecting the buoyancy of the service industries that dominate output in most economies. Three-month annualised growth rates show this acceleration in advanced economy growth with the seven big advanced economies recording GDP growth of around 2½% in the second quarter. The trend slowing in the emerging economies through the last few years has been broad-based. There have, however, been signs of a stabilisation or even acceleration in the pace of activity in some big economies recently, notably Brazil and China.
- The first half of 2013 saw a clear upward trend in activity across the advanced economies. Industrial output started rising toward the end of 2012, coinciding with much stronger business surveys across all of the big advanced economies. The latest data show a modest setback to this picture; the rate of three-month annualised industrial growth fell slightly in July and the level of industrial output levelled out or dipped slightly in North America and the Euro-zone. Purchasing manager surveys for the UK and the Euro-zone turned down slightly. On the other hand, US and Japanese business surveys have kept rising. It is too early to become overly concerned by the dips in advanced economy industrial growth. The US Government shutdown is an added uncertainty hanging over the growth outlook – the direct effect of a four week closure could reduce quarterly growth by around 0.1 percentage points.
- Recent trends have been mixed across the big emerging markets. The Chinese economy has fared better than many feared with recent indicators of industrial output, fixed investment and retail trade showing no evidence of an economic “hard landing”. While the Chinese authorities want to achieve a gradual re-balancing of the economy’s growth away from investment spending towards consumption, they do not want to unduly depress the rate of growth. The Indian economy continues to under-perform with growth down to around 4½% yoy in the June quarter. Partial data on output and trade remain weak and the business surveys are mixed.
- While some of the latest data on global trade and industrial output and some business surveys show a modest slowing in advanced economy growth, national surveys on firms’ expectations still show very buoyant results. Our measure averaging business sentiment across industry in the US and Western Europe shows a widespread expectation that things will either keep getting better (UK, US, Germany) or not be quite as bad (France). In the emerging markets, Chinese surveys are better than they were and the Indian surveys are a mixed bag. So are readings from across East Asia with South Korea slightly better, Thailand worse and little change in Taiwan, Indonesia or Singapore.
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