Investment update - April 2019

After a stellar first quarter of 2019, April was comparatively mixed for global markets, with upside surprises to GDP growth in the US and the Eurozone offset by a resurgence in Sino-US trade tensions in early May. In Australia, a poor inflation print ahead of the federal election solidified market expectations of two RBA rate cuts in 2019.

The Australian federal election was held on 18 May, with the incumbent Liberal-National Coalition now likely to win a lower house majority. The result ran contrary to polling that had consistently put the opposition Labor Party as favourite. The Coalition has promised future tax cuts and a return to budget surplus, although the latter is contingent on ongoing population growth and strong demand for commodities exports. The inflation print for the March quarter was below consensus at 0% quarter-on-quarter, pushing the year-on-year rate down to a multi-year low of 1.3%. 

The downside inflation surprise significantly increased expectations of an RBA rate cut in early May, however rates were ultimately left on hold. Nonetheless, the latest RBA guidance for the economy included downward revisions for GDP and inflation over 2019, and has firmed up market expectations of a mid-year rate cut, with a second cut priced as likely by year-end.

Australian sentiment indicators also reflected a more pessimistic outlook, with business conditions in particular plummeting to below average levels from record highs just a year ago. 

The US economic picture was more positive. First quarter GDP growth of 3.2% year-on-year was well above consensus, while the unemployment rate fell 0.2% to a nearly 50-year-low of 3.6%. Wage growth increased at an unchanged annual rate of 3.2%. As has been the case for some time, inflation data remained weak, with the Core PCE Index growing by an annual rate of 1.3%. The ongoing dearth of inflationary pressures has contributed to a potential revision by the Federal of its inflation targeting approach in June, which may provide more leeway for inflation to push beyond the current 2% target if this is required.

After signs of détente in recent months, US-Chinese trade tensions again increased as talks between the two broke down in early May. As a result, the US raised tariffs on US$200 billion of Chinese goods and threatened tariffs on a further US$300 billion, while the Chinese government retaliated with increased tariffs on approximately US$60 billion of US goods from 1 June onwards.

More favourably, China’s first quarter GDP growth of 6.4% year-on-year proved robust, while survey data suggests the services sector outlook remains expansionary; although the manufacturing sector remains more challenged.

As with the US, recent Eurozone economic data was more positive compared to earlier in the year. First quarter GDP growth doubled the prior quarter’s rate to take the annual figure to 1.5%, while Italy exited its technical recession after posting marginally positive growth. The European Central Bank also hinted that it does not believe the region’s economic slowdown is as bad as initially feared, although the EU Commission’s latest forecasts did cut expected growth.

In the UK, the Brexit delay offered some respite for Prime Minister Theresa May, however cross-party talks to try to reach agreement on a Brexit deal have failed thus far. Labour market conditions remains strong, with unemployment at a 44-year low of 3.8%, while growth in average weekly earnings has now hit an annual rate of 3.4%.

Equities markets had another strong month in April, with a weaker Australian dollar buoying unhedged overseas equities exposure in particular. Strong corporate earnings in the US helped the S&P 500 index hit a record high in early May, while a tightening of US sanctions on Iran pushed crude oil prices to over US$70 per barrel. In Australia, the ten-year Commonwealth Government bond yield fell from a high of 1.96% in mid-April to a new record low of 1.68% in early May, while in the US the three-month versus 10-year yield curve again inverted. This helped Australian fixed interest indices outperform their global counterparts.

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