Economic And Market Summary

US macroeconomic data was softer than expected in May, suggesting that the rate of growth in the US economy may be slowing. Labour market data disappointed, with just 54,000 jobs created during the month, significantly below consensus estimates of around 195,000 and the average level over the prior three months (220,000). The unemployment rate increased slightly to 9.1%. Private sector jobs growth remained weak while government jobs continue to decline, reflecting job cuts by state and local governments. The closely watched ISM manufacturing economic indicator was also much weaker than expected and the lowest reading in 12 months, pointing to a more subdued expansion for the manufacturing industry. 

Sovereign debt concerns once again came into focus as European authorities failed to reach agreement on a fresh rescue package for Greece. The Greek government faces increasing political pressure domestically and continuing protests against austerity measures needed to stabilise debt levels and meet the obligations of the existing IMF/EU bailout. Greece’s government debt burden is approaching €340 billion or around 150% of GDP, and this level is projected to increase further as the Greek economy contracts. Markets remain concerned about the possibility of a Greek government default, and are currently pricing a significant probability of a default or restructure over the next two years. This could have significant implications for the stability of the financial system, as it is understood that exposure to Greek debt is concentrated in a number of French and German banks. The potential for contagion risk for countries such as Portugal and Ireland is also a material concern.

Despite the issues in peripheral Europe, the core European economies of France and Germany continue to perform well. The European Central Bank increased interest rates to 1.25% in April (the first increase since the global financial crisis), and is expected to raise rates further later in the year in light of accelerating inflation.

In Australia, the commodity and agricultural sectors continue to perform well. However, many other sectors are struggling with the high Australian dollar, relatively high interest rates and a cautious consumer. Consumer sentiment declined in May, and the household savings rate increased to a level not since seen the global financial crisis. This has hurt the consumer discretionary sectors, while retail sales have also been impacted by fierce online competition (fuelled by the strong Australian dollar). The Australian economy contracted by 1.2% in the March quarter of 2011, mainly reflecting the impact of the Queensland floods which resulted in a fall in resource exports (particularly coal). While the contraction was larger than expected, many expect growth to recover swiftly as production and exports resume. The RBA has kept interest rates on hold since the last increase in November 2010 to 4.75%. The Australian dollar ended May at US$1.07, declining by 2.6% over the course of the month.

While the longer term outlook remains favourable, growth in emerging market economies has also begun to slow, reflecting the impact of fiscal and monetary policy tightening in a number of countries to rein in high and rising inflation. In particular, markets remain focussed on the slowing in the Chinese economy and the possibility that excessive tightening could result in a ‘hard landing’.

Weaker economic data and Greek sovereign debt concerns saw equities sell off during May. The Australian equity market saw some of the largest falls, with the S&P/ASX 200 declining 2.4% over the course of the month. The S&P 500 decreased by 1.4% and the MSCI World Price Index was down 1.7%, both in local currency terms. However, the fall in the Australian dollar offset some of these declines for unhedged Australian dollar investors.

Fixed income markets rallied during the month, due to the weakening global economic outlook. The global fixed income benchmark outperformed the benchmark for Australian fixed income over the month, although it remains marginally behind over 12 months.

Source: Access Capital Advisers Pty Ltd.

This article provides general information only and may not be relied on as legal or financial advice.

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