Shares markets fell over the last week as global growth worries seemingly returned despite mostly okay economic data and the minutes from the Fed’s last meeting affirming that it will be cautious in raising interest rates. Japanese shares were hit by a rise in the value of the Yen and worries about banks continued to weigh on the Australian share market along with falls in energy and consumer stocks. The growth worries and risk off tone also saw bond yields fall, the Yen rise and the $A fall to around $US0.75. Metal prices fell sharply but oil rose slightly in the lead up to an April 17 OPEC meeting to discuss freezing oil supply.

While comments by the IMF’s Christine Lagarde about global growth being too slow and fragile added to investor nervousness, there was nothing really new in this. IMF forecasts for global growth of 3.4% this year are still too optimistic and likely to be revised to around 3%. While her comments are likely aimed at encouraging governments to undertake more supply side economic reforms, it is noteworthy that a broad based gain in business conditions PMIs in March suggest global growth momentum may have improved a bit lately, or at least stabilised.

The rise in the value of the Yen (+14% against the $US since last year’s low) is worth keeping an eye on. Not only is it bad for Japanese growth but it can also be seen as a negative sign for the global economy to the extent that it may signal unwinding carry trades (where investors borrow cheap in Japan and invest elsewhere) and hence less risk taking in capital flows. The flipside though is that a rising Yen is just a normal phenomenon of periods of investor nervousness and in any case the higher the Yen goes the greater the pressure on the Bank of Japan to undertake more monetary stimulus.

In the US, Donald Trump’s loss in the Wisconsin primary suggests his campaign may be finally starting to falter under the weight of his “open mouth approach”. To reach the 1237 majority of delegates to the Republican convention in July he needs to win 56% of the delegates in remaining primaries but so far he has only been winning 47% of delegates. This is a particular challenge with big states like New York (April 19) and California (June 7) ahead where he is not polling so well. It’s also virtually impossible for Ted Cruz to win the 1237 majority as he would need to win 82% of remaining delegates against a win rate so far of just 33%. So a contested convention looks highly likely – better than putting up a bad candidate. On the Democratic side Hilary Clinton remains on track to win her party’s nomination requiring only 32% of remaining delegates against a win rate so far of 62%. Common sense could yet win out in the US presidential election!

In Australia, the RBA left interest rates on hold as expected but expressed discomfort at the rise in the value of the Australian dollar indicating it “could complicate the adjustment under way in the economy”. The clear implication is that the rise in Australian dollar has increased the chance that the RBA will act on its bias to ease interest rates again. With growth set to slow a bit as mining investment continues to unwind and the contribution to growth from housing slows, unemployment likely to remain around a relatively high 6%, inflation likely to remain low, the banks likely to raise mortgage rates again independently of the RBA (the Bank of Qld already has) and the bounce in the $A threatening growth in globally focussed sectors like tourism and higher education our view remains that the RBA will cut interest rates again. A soft March quarter inflation report due April 27 could drive this in May – but it may not occur until the June quarter.

Major global economic events and implications

In the US the trade deficit expanded in February, but job openings, hirings and the quit rate (a guide to worker confidence in the job market) remain strong, jobless claims remain low and the non-manufacturing conditions ISM improved in March. The Atlanta Fed’s GDPNow data tracker now puts March quarter GDP growth at just 0.4% annualised but recall the seasonal pattern over the last 20 years that has seen growth average just 1% in the March quarter but 3% in the June quarter so this and the improvement in March PMIs suggests there is no reason to get fussed. Meanwhile, the minutes from the Fed’s last meeting affirmed that it would be cautious in raising interest rates with Fed officials overall having little inclination to raise interest rates again at its April meeting. Comments by Fed Chair Janet Yellen that she still sees some labour market slack are consistent with this.

Eurozone data was mixed with weak German factory orders and a fall in the services conditions PMI in March, however the level of the services conditions PMI still remains consistent with moderate growth and unemployment fell again in February (albeit the level remains high).

The worse could be over for Chinese capital outflows. Chinese foreign exchange reserves rose in March for the first time in five months. After adjusting for valuation effects the pace of decline in reserves has slowed to $US42bn in March from $US142bn in December, suggesting capital outflows are slowing. Maybe there is more confidence that the Renminbi and the Chinese economy are not going to crash. In terms of the latter, China’s Caixin services conditions index improved in March adding to confidence that growth momentum improved.

The Reserve Bank of India cut interest rates, highlighting yet that global monetary conditions are still becoming easier.

Australian economic events and implications

Australian data was on the soft side. Building approvals bounced 3% but this followed a 6.6% decline and the trend is clearly down pointing to slowing housing investment in the year ahead (see the next chart), retail sales were weaker than expected in February and look to have lost momentum, the trade deficit widened in February, services and construction conditions PMIs softened in March (in contrast to manufacturing sector strength) and the Melbourne Institute’s Inflation Gauge for March showed both headline and underlying inflation running below 2% year on year.

What to watch over the next week?

In the US expect to see better growth in March retail sales (Monday), CPI inflation of 1% year on year and core inflation of 2.3% yoy (Wednesday) and another slight fall in industrial production (Friday). The Fed’s Beige Book of anecdotal evidence (Wednesday) will also be released. Meanwhile, Alcoa will unofficially kick off the March quarter earnings reporting season. With consensus estimates expecting an 8-9% yoy fall in profits there is some scope for upside surprise.

Chinese March quarter GDP growth (Friday) is likely to show a further slight loss of momentum to 6.7% yoy, from 6.8% in the December quarter consistent with soft data seen at the start of the year. But more timely March data is likely to show continued strength in credit growth and money supply, some improvement in export and import growth (Wednesday) and stable or improved growth in industrial production, retail sales and fixed asset investment (all due Friday). Inflation for March (Monday) is likely to show a slight rise to 2.4% yoy reflecting higher food prices.

An OPEC meeting on April 17 to discuss freezing supply will be watched closely with the main issue being whether Iran is included in any supply freeze. It’s hard to see why Iran would want to freeze its output as it’s still recovering from the removal of sanctions, so it’s hard to be optimistic as to the impact of an oil supply freeze if it just includes the other members (assuming Saudi Arabia agrees to that anyway) because overall supply from OPEC would still be rising as Iran ramps up its production.

In Australia, expect to see a rise in housing finance for February (Monday), little significant change in business and consumer confidence (Tuesday and Wednesday respectively) a 20,000 jobs gain for March and a slight rise in unemployment to 5.9% (Thursday). The RBA’s half yearly Financial Stability Review (Friday) will be watched for an update of the RBA’s assessment regarding risks around the property market.

Outlook for markets

After strong gains from their February lows global are overbought and vulnerable to a pull back, which could further weigh on Australian shares. Beyond the near term uncertainties though, we still see shares trending higher this year helped by a combination of relatively attractive valuations compared to bonds, further global monetary easing and continuing moderate global economic growth.

Very low bond yields – with 25% of global sovereign bonds now having negative yields – point to a soft medium term return potential from them, but it’s hard to get too bearish in a world of fragile growth, spare capacity, weak commodity prices and low inflation. Bonds in higher yielding countries like Australia, the US and maybe even China are relatively attractive.

Commercial property and infrastructure are likely to continue benefitting from the ongoing search by investors for yield.

National capital city residential property price gains are expected to slow to around 3% this year, as the heat comes out of Sydney and Melbourne. Prices are likely to continue to fall in Perth and Darwin, but price growth is likely to pick up in Brisbane.

Cash and bank deposits are likely to continue to provide poor returns, with the RBA expected to cut the cash rate to 1.75%.

The ongoing delay in Fed tightening and stronger data in Australia pose further short term upside risks for the $A. However, any further short term strength in the $A is unlikely to go too far and the broad trend is likely to remain down as the interest rate differential in favour of Australia narrows as the RBA eventually resumes cutting the cash rate and the Fed eventually resumes hiking, commodity prices remain weak and the $A undertakes it’s usual undershoot of fair value

By Shane Oliver, AMP Capital

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Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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