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 first estimate of Q4 2015 GDP was released indicating growth was 0.7% on a seasonally-adjusted-annualised-rate, below expectations and lower than the 2% recorded in Q3 2015. Personal spending rose 2.2%, while net exports and inventories each subtracted 0.5% from GDP. Overall for 2015, the US economy grew by 2.4% for the second straight year.
2. Europe and the UK
The European Central Bank (ECB) met on 21 January 2016 with no changes to monetary policy announced. The ECB last made changes in December 2015 when the interest rate on the deposit facility was cut by 10 basis points to -0.30% and the asset purchase program (APP) was extended until the end of March 2017 with the ECB noting at the January meeting that the “decisions were fully appropriate. They will result in a significant addition of liquidity to the banking system and will strengthen our forward guidance on interest rates”.
The Bank of England (BoE) left policy unchanged when it announced its decision on 14 January 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 29 January 2016 and added a new dimension to their policy armoury by lowering by 20 basis points one of its new threetiered policy rates to -0.1%. The BoJ has labelled the policy action “Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate.”
The BoJ, led by Governor Kuroda, was likely prompted into action in response to the weaker inflation data, with headline inflation of just 0.2% per year recorded for December, well below its 2% inflation target. Recent Yen strength would also have been a concern for the BoJ, (signalling their unwillingness to tolerate JPY/USD below 120), as well as also wanting to break recent deflationary trends ahead of the upcoming wage negotiations.
4. Australia
The Reserve Bank of Australia (RBA) left the official cash rate on hold at 2% on 2 February 2016 – where it has remained since May 2015.
The unemployment rate remained at 5.8% in November, well below its most recent peak of 6.4% in January 2015. Q4 2015 headline CPI rose by 0.4%/qtr, slightly above expectations, with the annual rate increasing to 1.7%/yr, below the RBA’s 2%-3% target range. The largest gains in inflation were in Alcohol and Tobacco (+2.7% per quarter) primarily driven by an increase in the federal excise tax on tobacco and the Clothing and Footwear group (+1.6% per quarter). Offsetting the gains were price falls telecommunication equipment and services (-2.4% per quarter) and the Transportation group (-1.4% per quarter) due to a 5.7% per quarter fall in fuel prices.
The Australian dollar was mostly weaker against the major cross currencies in January. The AUD finished down 2.8% against the USD to $US0.7084. These losses occurred despite reduced expectations of the US Federal Reserve continuing to raise interest rates in 2016.
The Australian dollar fell against the euro (-2.5%) and yen (-2.1%) and rose against sterling (+0.5%) and NZ dollar (+2.5) over the month of January.