Market Update: Week in Review (April 13)

Germany Euro Sculpture

Global equity markets meandered higher in a shortened week with little international news flow. Liquidity has been fairly thin, and the combination of holidays, a lack of narrative altering news and the looming 1Q15 earnings season has paralysed activity a little as investors wait to see the numbers. Despite the lethargy, Europe continues to trade well with most data pointing to a broadening recovery which is encouraging against the backdrop of geopolitical concerns in the wider region. Greek sovereign yields aside, the rest of the periphery has actually been quite well behaved in terms of spread to German bunds. Oil markets continue to gyrate, with a set of bearish inventory reports from the US on Wednesday just the latest piece of information keeping investors guessing about the timing and trajectory of a recovery. It looks like this will be more “U” than “V” shaped due to the lag between reduced rig count and curbed supply, continuing inventory build in the US, and plans to ramp up production in OPEC nations such as Iran, Iraq and Kuwait.

Australian equities closed higher last week with the S&P/ASX200 gaining +1.18% to finish at 5,968.37. Tuesday’s sharp rally was cut abruptly short as the he RBA Board left the cash rate steady at 2.25% despite many economists expecting a 25bp cut. Recent Board meeting minutes have suggested officials are more interested in assessing the impact of the February move than they were in moving to add further support, and last week’s decision was consistent with this theme. The RBA’s April statement is pretty similar to that delivered in March. The easing bias is still there: “further easing of policy may be appropriate over the period ahead”, and the depiction of the economy is by now very familiar: growing below-trend, with a degree of spare capacity to be evident for some time yet. The only new commentary on the domestic data relates to credit growth – first that business lending appears to be “strengthening” (a positive for the anticipated non-mining cap-ex recovery) and second a mention that neither investor nor owner-occupier credit growth “appears to picking up at present” i.e. sequential growth rates may have peaked. These latter comments facilitate the RBA’s desired message that housing strength should not be an impediment to lower rates if they are needed, though we suspect this is becoming a constraint of sorts. On a positive note, the momentum in Australian consumer spending evident in 4Q has continued into 1Q, with retail sales beating expectations at +0.7%m/m in February (exp. +0.4%m/m). The perkiness of household goods retailing has been spread across electrical goods, hardware, and furniture. This could be evidence that the long trend of deflation in such imported items is ending as AUD averages lower, or it could just be a natural implication of a booming housing market. Despite nominal drags, overall retail spending has accelerated through the last few months, consistent with our view that real consumer spending would be buoyed by the fall in oil prices. The outlook beyond 2Q gets murkier given that local petrol prices will (presumably) no longer be adding an impulse to disposable income, and with unemployment still biased slightly higher. There is, though, scope for the saving rate to keep averaging lower.

In Asia, the Bank of Japan stayed on hold last week as expected, and the statement published after the meeting was almost the same as the previous 2 one. Governor Kuroda dismissed the recent softness of the consumption and wages at the press conference, by saying that the underlying trend of wages and consumption remained firm, and that wages would rise in FY2015 against the backdrop of tightened labour market, which should increase the consumption.

US equity markets closed higher last week with the Dow Jones Industrials Average, S&P 500 and NASDAQ gaining +1.66%, +1.70% and +2.23% respectively. The minutes to the March 18 FOMC meeting didn’t provide a whole lot of new information about the Committee’s policy leanings. The minutes reported that “several” favoured a rate hike at the June meeting, but we note that (a) this refers to “participants,” including non-voters, who tend to skew a little more hawkish than the more influential voting members of the Committee, and (b) this was obviously before the March payrolls disappointment. Instead, the thrust of that passage seemed pretty consistent with the dots: a number favouring a Q2 lift-off, but many also favouring Q3 and only two who viewed later than 2015 as appropriate for a first move.

European equity markets closed higher last week, with the DAX, FTSE and Stoxx Euro 600 gaining +3.40%, +3.75% and +3.80% respectively. The March Euro area composite PMI was revised down a tenth to 54.0, as the final services component printed a touch lower than the flash release. The composite survey nevertheless increased 0.7pt in March and the gain since the beginning of the year has now reached 2.6pt. The trajectory of the PMI at the start of the year has been encouraging. As a number of drags are fading (fiscal tightening and credit channel) and a number of supports are in place (monetary stance and lower oil prices), we expect the pace of activity to improve further in the coming quarters. Euro area retail sales were solid in February, as already indicated by the national reports. In volume terms, retail sales fell 0.2%m/m, but considering the average gains of 0.5%m/m during 4Q14 and the 0.9%m/m jump in January, the February “payback” is tiny. By country, Germany looks particularly strong, but, most other countries are also tracking decent increases. In terms of total consumer spending, the indications are also good, given the strength of retail sales, the surge in car registration and very upbeat consumer confidence.

Commodities: Gold: US$1,207.57 (+0.39%), Brent Crude: US$57.87 (+5.31%) Iron Ore (Quingdao 62%): US$47.53 (+0.96%).

Currencies: AUD/USD: 0.7682 (+0.64%), AUD/GBP: 0.5249 (+2.61%), AUD/EUR: 0.7243 (+4.16%), AUD/JPY: 92.37 (+1.70%).

Economics: Tue: Business confidence (Mar), Wed: Consumer confidence (Apr), Thu: Labour market (Mar).