Below trend growth to continue
The US Federal Reserve has given itself the flexibility to raise interest rates from June, responding to record jobs growth. Meanwhile in Australia, consumer and business confidence has eased back in the most recent surveys, despite the recent interest rate cut.
After rising strongly in February, global equities lost 0.4% in March due to a 1.6% decline in the US equities market.
During March, we saw some US economic indicators, such as construction and retail sales, temporarily impacted by severe winter weather. But the US labour market continues to grow at its strongest annual rate in almost 15 years. A stunning 295,000 new jobs were added in February, which took the unemployment rate to 5.5%, the lowest level since September 2008. As a result of the strong employment growth, the US Federal Reserve removed the word “patient” from its post meeting statement. This gives it the flexibility to raise interest rates from June. However, in a somewhat contradictory move, the Fed actually lowered its own forecasts of where interest rates would be at the end of this year.
In Europe, we had some reasonable economic data out of Germany with stronger than expected increases in industrial production, as well as improvements in business sentiment and manufacturing activity. Annual inflation in Germany also returned to positive territory in February, helped by the weaker Euro and the introduction of a minimum wage. This put an end to January’s price deflation.
German shares continued to reach fresh record highs, gaining 5% in March, and 22% so far this year. Yields on 10-year German government bonds fell to just 0.19% per annum.
In China, March data was weaker than expected. There was a drop in the HSBC manufacturing PMI index to an 11-month low. There was also slower than expected growth in retail sales, industrial production and fixed asset investment. As a result of slower activity, the Peoples’ Bank of China announced several measures to make buying and selling a home cheaper, in an attempt to revive the property market.
In Australia, consumer and business confidence eased back in the most recent surveys, despite the recent interest rate cut. However, other measures of economic activity such as retail sales and employment growth weren’t too bad.
Australian shares lost 0.1% in March, with energy and resources stocks down 6% due to further falls in oil and iron ore prices.
House prices in Australian capital cities continue to power ahead, up 1.4% in March or 7.4% over the past 12 months. However, the gains are heavily concentrated in Sydney, and to a lesser extent in Melbourne, with more subdued conditions in the other capitals. This is driving strong investment in housing, particularly new apartments, which should help push up Australia’s economic growth this year, at a time when investment in the resources sector is contracting.
The Australian Dollar fell nearly two US cents in March, opening the month at US$0.7826 and closing at US$0.7640.
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