- Perhaps paradoxically, February’s market turmoil was a response to signs that the global economy is reducing slack
- US employment and wage indicators led investors to take a more “inflationist” view, with a rise in yields pre-empting future Fed tightening
- Price pressures in Europe also appear to be picking up, with PMIs pointing to stronger economic growth in Q1 2018
- The Chinese economy appears to be stuck in neutral, with mixed PMIs and inflation falling to 1.5% year-on-year
- The Australian economy continues to improve, but wages growth remains subdued and the RBA is unlikely to raise rates in the near term
The market’s attention has turned to the outlook for inflation, and the potential for central banks to respond with tighter monetary policy. The resultant rise in bond yields, together with a reassessment of equity market valuations, gave way to February’s market pullback. Economic indicators are robust, but anticipated interest rate moves are a key determinant for markets.
The outlook for Australia continues to improve, with unemployment expected to approach 5% over coming years and wages growth to pick up modestly. Australia’s labour market continues to tighten, with 16,000 seasonally adjusted jobs added in January. The past 12 months have seen the participation rate grow steadily, from 64.8% to 65.6% in trend terms—close to historic highs and back to pre-GFC levels.
With the US unemployment rate falling to 17-year lows, the expectation of both policymakers and investors is that wages growth will eventually pick up, and with it inflation. January data provided evidence that the US economy may be starting to run up against some capacity constraints.
Growth in the eurozone continues to surprise on the upside, with GDP rising 0.6% in the December quarter, bringing year-on-year growth to 2.7% (which is significantly higher than what economists were predicting at the start of 2017). It is even possible that the 0.6% figure may be revised higher in line with recent trend revisions.
China’s February PMI readings were mixed, with the official index down to 50.3 from 51.3 and missing expectations, while the Caixin PMI moved slightly higher from 51.5 to 51.6. Industrial production growth in December was 6.2%, which narrowly beat consensus, while private investment was subdued at 7.2% and retail sales growth eased to 9.4% from 10.2%.
Japanese GDP rose by a disappointing 0.1% in the December quarter, slowing from a 0.6% rise in the previous quarter, however this is the eighth consecutive quarter of growth. Bank of Japan governor Haruhiko Kuroda was renominated for another five year term, signalling Prime Minister Abe’s renewed commitment to pushing up inflation, which to date has struggled to rise much above zero.