Economic Update and Market Commentary
Risk assets including equities and credit continued to power ahead in April. Locally, the share market and the Australian dollar were supported by rising commodity prices.
Investors continued to monitor Covid cases and the pace of vaccine rollouts worldwide. Thankfully there remain very few infections in Australia, although rising numbers elsewhere has provided a reminder that the pandemic is far from over.
The economic recovery in the US appears to be continuing apace, supported by massive government spending.
Commentators indicated the Biden Administration could raise capital gains tax rates to help finance additional spending. Initial reports suggest capital gains tax could almost double for high income earners.
US inflation has picked up. Consumer prices were up 0.6% in March and 2.6% on a rolling 12-month view. There remains concern that the high level of government spending could see inflation rise further, although policymakers insist the central bank has the tools to curb any inflation pressures.
900,000 jobs were created in March. This was comfortably ahead of expectations and saw the unemployment rate drop to 6.0%, from 6.2% previously. Whilst encouraging, employment numbers remain 8.4 million below pre-pandemic levels.
The easing of Covid restrictions has undoubtedly released pent-up demand and supported consumer spending. Retail sales rose by 9.8% month-on-month in March, supporting sentiment among retailers.
The latest inflation data were well below consensus forecasts. Price falls for fruit and domestic travel, along with increased government subsidy payments for new dwellings and electricity, resulted in headline CPI coming in at just 0.6% for the March quarter, versus expectations of a 0.9% increase. The annual rate rose to 1.1%, well below the 2% to 3% target range.
The Reserve Bank of Australia still expects wage and price pressures to remain subdued “for some years”, which suggests policymakers could be hesitant to unwind the accommodative monetary policies that are in place.
More than 70,000 new jobs were created in March – twice as many as forecast – which saw the unemployment rate drop to 5.6%. Interestingly, Australia is the only G20 country where current employment is above pre-Covid levels.
At 1.5% year-on-year, inflation in New Zealand was little changed in the March quarter. Official interest rates were left unchanged, at 0.25%.
Arguably the most significant development over the month was the removal of travel restrictions between New Zealand and Australia. This has created a quarantine-free Trans-Tasman travel ‘bubble’, which is expected to have a beneficial impact on the New Zealand economy, in particular.
Despite persistently high unemployment and reports of vaccine shortages in the region, consumer confidence in the Eurozone has risen back towards pre-Covid levels.
Indicators from over the English Channel may be providing some encouragement. More social distancing restrictions in the UK were lifted during April, and so far there have been no indications of any associated increase in Covid cases.
This suggests restrictions will continue to be relaxed as planned through May and June. The UK is well ahead of other European countries with its rollout program, with at least one vaccine already provided to more than half the population.
The post-Covid recovery in China appeared to lose momentum in the March quarter. The world’s second largest economy grew by just 0.6% during the period; much less than expected.
Exports remain strong, but small private companies are not yet enjoying the same level of growth.
There was an alarming spike in new Covid infections in India.
In general, services sectors are performing less well than manufacturers, partly owing to fresh virus outbreaks early in the year and ‘celebrate in place’ directives for February’s Lunar New Year holiday.
The Australian dollar was little changed in the first half of April, but started to strengthen in mid-month thanks to rising commodity prices. Iron ore prices climbed to new record highs, for example, and copper and LNG prices also increased.
In the month as a whole, the ‘Aussie’ appreciated by 1.4% against the US dollar – to 77.2 US cents – and by 0.8% against a trade-weighted basket of international currencies.
Rising earnings expectations saw the S&P/ASX 100 Accumulation Index rally 3.5% in April, as the effects of large monetary and fiscal stimulus programs continue to trickle through the economy. Improving economic data, rising commodity prices and a small decline in bond yields provided additional support.
Lower bond yields provided relief across the board for the Information Technology sector (+9.7%). The Materials sector also performed strongly, rallying 6.8% as the price of gold and iron ore moved higher.
Demand for iron ore has surged given the size of infrastructure-focused fiscal stimulus programs in Australia and elsewhere.
Small cap companies outperformed across the majority of sectors, enabling the S&P/ASX Small Ordinaries Index to close the month 5.0% higher.
Global property securities posted solid gains in April. The FTSE EPRA/NAREIT Developed Index rose 5.0% in Australian dollar terms, outperforming wider equity markets.
The best performing regions included the US (+8.2%), France (+7.0%) and the UK (+6.1%). Laggards included Japan (-0.4%), Singapore (+1.4%) and Hong Kong (+2.1%).
Real estate markets continue to be supported by stimulatory fiscal policy, which will most likely persist through 2021.
Combined with positive sentiment on the back of major markets reopening from Covid, these policy measure have seen demand in the sector increase. Locally, the A-REIT market increased 2.9%.
Most global share markets made solid progress, enabling the MSCI World Index to close the month 4.0% higher in local currency terms.
US equities led the way, with the S&P 500 Index and the technology-heavy NASDAQ both rising more than 5%. Both hit fresh all-time highs during the month.
Technology firms have performed particularly well during the pandemic, fuelled by stay-at-home guidelines and evolving consumer habits.
In Europe, most major bourses closed April between 1% and 4% higher. Italy was a notable laggard, returning -2.0%.
In Asia, major stock markets in China, Hong Kong and Singapore added between 1% and 2%, although the Japanese Nikkei 225 Index declined by 1.3%.
Emerging markets also registered solid gains, despite the spike in Covid infections in countries like India.
The MSCI Emerging Markets Index added 2.4% in local currency terms, extending gains made over the past year to nearly 50%.
Global and Australian Fixed Income:
Returns from global bond markets were mixed, with yields moving in opposite directions in the US and Europe.
In the US, 10-year Treasury yields paused for breath, moving 11 bps lower after having increased 83 bps in the March quarter. Conversely, 10-year Bund yields continued to increase, closing the month 9 bps higher, at -0.20%.
Yields on UK gilts and Japanese Government Bonds were unchanged over the month.
In Australia, 10-year Commonwealth Government Bond yields fell 4 bps, to 1.75%. This move helped the domestic fixed income market register steady positive returns over the month.
Sentiment towards global credit markets was supported by generally encouraging economic data, and pleasing corporate earnings releases for the March quarter.
Spreads narrowed in both the investment grade and high yield sub-sectors, resulting in positive returns from credit markets.
Spreads on some speculative grade bonds are now back to levels last seen prior to the GFC in 2008.
This is not necessarily a negative indicator, but is something for credit investors to monitor in case of a sudden reversal in sentiment.
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