Market drivers

Australia: Off to a soggy start

Poor weather was a factor behind GDP rising by only 0.3% over the March quarter. Cyclone Debbie will distort June quarter data but growth is expected to rebound over the second half of the year as the construction sector makes up for lost time and LNG export capacity continues to expand.

China: Growth resilience

Economic news remained mostly upbeat despite a reduction in policy support. Confidence among entrepreneurs and bankers is the strongest since 2013-14, according to central bank surveys. House prices have slowed but sales and housing starts have continued to grow.

Japan: Labour shortage

Labour market tightening continued but has yet to feed through to increased wage pressure. Worker shortages are the most widespread since 1992, according to the Tankan economic business survey. Cash earnings growth of 0.5% is barely higher than inflation.

US: Fed unfazed

The Federal Reserve hiked rates again while announcing plans to reverse quantitative easing (QE), despite its preferred core inflation measure falling to 1.4%. The Fed is focused on an increasingly tight labour market – unemployment and underemployment rates are at 10+ year lows.

Eurozone: Macron relief

Confidence was boosted by the election of Europhile reformist Emmanuel Macron as French President, with the EU Commission’s composite Eurozone economic sentiment indicator reaching a 10-year high. The unemployment rate fell further to 9.3%, an eight-year low.

Emerging markets: Inflation easing

Inflation in the “E7” emerging economies has fallen significantly over the past year, in contrast to a rise in the G7 developed economies. The E7 decline reflects large drops in Brazil, India and Russia due to economic weakness and currency strength.

Trends to watch

Australia: RBA in wait and see mode

Recent labour market improvement affords the RBA more time to leave rates unchanged while it assesses the impact of recent macro prudential measures on the pace and composition of lending and trends in house prices.

China: Policy reversal?

Market interest rates rose significantly during the first half but inflation and currency pressures have eased, giving the authorities scope to reverse policy tightening. Producer prices have stabilised since the spring, while foreign exchange reserves have recovered.

Japan: QE reacceleration?

Falling global bond yields (rising bond prices) allowed the Bank of Japan (BoJ) to slow QE while maintaining domestic yields near zero. A rebound in global yields could force it to step up purchases, attracting domestic criticism – unless the yield cap is lifted.

US: Money revival

Narrow money leads the economy and has picked up since early 2017, suggesting stronger growth during the second half. Bank lending is also reviving after weakness. A continuation of these trends could signal a need for faster Fed tightening.

Eurozone: Core inflation

Unemployment is on course to reach estimates of the “equilibrium” rate in 2018, arguing that the ECB should be withdrawing policy stimulus. Core inflation remains low but has firmed – a further rise could trigger a faster QE exit.

Emerging markets: Relative money

E7 real (i.e. inflation-adjusted) narrow money growth – adjusted for the negative impact of India’s “demonetisation” – was above the G7 level between late 2015 and early 2017. A recent closing of the gap could signal less favourable relative economic prospects.

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