MARKET AND ECONOMIC OVERVIEW
- The Reserve Bank of Australia (RBA) held the cash rate steady at 2.5% at its 5 August 2014 meeting. There was no change to the Board’s neutral policy ‘guidance’ and signal that there is likely to be “a period of stability in interest rates”.
- The RBA released its Statement on Monetary Policy and updated its GDP and inflation forecasts. The RBA lowered its GDP growth forecast by 0.25%/pts to 2.75% for December 2014, and lowered its June 2015 forecast to between 2 and 3% (was 2.5 to 3.5%). These downgrades largely reflect a stronger Australian dollar, weaker than expected non-mining capital expenditure and a softer labour market.
- The RBA slightly revised down its near term CPI forecast to 2% from 2.75% for December 2014, with removal of the price on carbon.
- There remains a high degree of uncertainty over forecasting the outlook for growth and inflation, largely due to the current transition from mining to non-mining sources of growth and movements in the Australia dollar.
- The unemployment rate rose for the month of July (data released in August), from 6.0% to 6.4%, a larger rise than expected. Overall 300 jobs were lost in July.
- Q2 2014 Capital Expenditure data showed a rose of 1.1% 4.2% per quarter, to be down 4% over 12 months. There are some tentative signs of stabilisation in the non-mining side of plans.
- There was no meeting of the Federal Open Market Committee (FOMC) in August. However the minutes to the July meeting were released and Chair Janet Yellen spoke at the annual Jackson Hole symposium on the topic of ‘Labour Markets’.
- The release of the July minutes of the FOMC indicated a slightly more ‘hawkish’ Federal Reserve Board then the short statement post the July meeting suggested, especially in relation to the labour market. The minutes noted “participants generally agreed that both the recent improvement in labor market conditions and the cumulative progress over the past year had been greater than anticipated and that labor market conditions had moved noticeable closer to those viewed normal in the longer run.”
- The employment market continues to heal with 209,000 jobs added in July, this was lower than the 298,000 added in June, however the six-month average is now 244,000. The unemployment rate rose to 6.2%, from 6.1% with a gain in the participation rate. However wages growth remains stagnated at 2.0%.
- The European Central Bank (ECB) left all three of its key interest rates on hold at its 7 August 2014 meeting as expected.
- There are growing expectations of future policy action at the ECB, potentially as early as the September meeting. This follows ECB President, Mario Draghi’s comments at the Jackson Hole symposium “we stand ready to adjust our policy stance further”. This follows a fall in inflation expectations, weaker activity indicators and low inflation figures.
- The Bank of England (BoE) left policy unchanged at its 7 August 2014 meeting, as expected. The Bank Rate was unchanged at 0.5% and the stock of asset purchases remained at £375bn. However for the first time since July 2011 two members of the nine-member committee voted for a rise in the Bank Rate, arguing economic circumstances were sufficient to justify an immediate rise in the Bank Rate and even after this rise, policy would remain extremely supportive.
- The unemployment rate fell to 5.6% for Q2 2014 from 5.9% in Q1 2014, although a lower participation rate did assist the fall.
- The Bank of Japan’s (BoJ) policy board convened on 8 August 2014 and decided by unanimous vote to leave current monetary policy settings unchanged, as expected. The BoJ will continue to carry out money market operations so that the monetary base increases by around ¥60-70trn a year.
- There were signs of fading economic momentum in China over August. The official Manufacturing PMI fell to 51.1 in August from 51.7 and the HSBC Manufacturing PMI fell to 50.2 from 50.3. Both the new orders and production components fell suggesting weakening domestic demand.
The Australian dollar (AUD) rose by 0.5% per month to finish August at $US0.9341. The Australian dollar continues to trade in a tight range against the USD dollar with markets keenly waiting for a change in policy direction by the Federal Reserve. Over the past five months the Australian dollar has troughed at $US.9226 and reached as high as $US0.9496 indicating low volatility in currency markets.
Commodity prices were mixed in August, although the clear standout was a 8.1% fall in the price of iron ore. This took the iron ore price to $US87.9 per dry metric tonne for 62% fines on rising supply and questions over the demand profile from China.
News flow in the Australian sharemarket was dominated by the release of companies’ earnings for the six or 12 months ending 30 June 2014. Few companies announced results that significantly surprised investors; most were broadly in line with expectations.
Source: Colonial First State