An economic update from Colonial First State Global Asset Management.
What have been the major economic events of the past few months?
1. United States
The Federal Open Market Committee (FOMC) of the US Federal Reserve Board meet on 2 to 27 April 2016 and as widely expected held the Fed Funds target rate unchanged at 0.25% to 0.50% the rate set in December 2015.
The first estimate of Q1 16 GDP showed growth was 0.5% on a seasonally-adjusted-annualised-rate, slowing the annual rate to 1.9% from 2% in Q4 2015. While consumption remained supportive (+1.9%), inventories and trade subtracted 0.7% from growth and capital investment fell by 5.9% due to the continued decline in mining and energy investment. The Fed’s preferred measure of inflation; Core Personal Consumption Expenditure Price Index rose 0.1% in March, lowering the annual rate at 1.6%, the three month annualised rate is however 2.1% suggesting a pickup in core inflation.
2. Europe and the UK
The European Central Bank (ECB) met on 21 April 2016 with no changes to monetary policy announced. The ECB last made changes in March 2016 when they announced a broad easing package, including interest rate cuts, an increase of the asset purchase program and an expansion of the Targeted long-term refinancing operation (TLTRO) program. The next ECB meeting is 2 June 2016.
The first estimate of Q1 2016 GDP beat expectations, accelerating to 0.6% per quarter from 0.3% per quarter in Q4 2015, with the annual rate steady at 1.6% per year. Spain (+0.8% per quarter) and France (+0.5% per quarter) beat expectations, Germany and Italy will report later this month.
The Bank of England (BoE) left policy unchanged when it announced its decision on 14 April 2016, as expected. The Bank Rate was unchanged at 0.5% and the stock of asset purchases remained at £375bn.
3. Japan
The Bank of Japan’s (BoJ) policy board convened on 28 April 2016 and disappointed markets by monetary policy unchanged. They did however announce a funds-supplying operation to banks in the area affected by the Kumamoto earthquakes.
The BoJ downgraded their outlook for GDP and CPI, pushing out the timeline to achieve 2% inflation by 6 months to “in FY2017” from “in 1H FY2017”.
Headline CPI decreased from 0.3%/yr to -0.1%/yr over March while the core measure excluding food and energy decreased 0.1% to 0.7%/yr, both well below the BoI's 2% target.
4. Australia
The Reserve Bank of Australia (RBA) cut the official cash rate from 2% to 1.75%, a new all-time low, at their May meeting. The next RBA Board meeting is 7 June 2016.
The RBA slightly downgraded their outlook for the economy “growth is continuing in 2016, though probably at a more moderate pace” and their assessment of recent labour market indicators to “mixed of late”.
Employment growth was stronger than expected with 26,100 jobs added compared to the 17,000 expected. This was mostly driven by part-time jobs growth which is up by 150,000 over the past year. The participation rate held steady at 64.9%. Business conditions and confidence, as measured by NAB remain supportive with Conditions up 3 to +12 while confidence was up by 3 to +6 in March before falling to +9 and +5 respectively in April.
The Australian dollar depreciated against the major currencies in April. The AUD finished down 0.9% against the USD to $US0.7603. This fall was largely driven by increased expectations of an RBA rate cut after the weak Q1 CPI print.
The Australian dollar fell against the euro (-1.5%), the sterling (-2.4%), the yen (-6.2%) and NZ dollar (-1.7%) over the month of April.
