- The global economy is maintaining momentum and inflation is gradually moving higher in line with central bank targets.
- Growth in US average hourly earnings is still not showing conclusive evidence of a sustained pickup in wages.
- The threat of a trade war between the US and China is creating significant uncertainty for markets.
- Euro area inflation was 1.4% in March, up from 1.1% in February but still well below the ECB’s target.
- The Australian economy continues to improve, but the RBA is wary of the impact of interest rate rises on the household sector.
While underlying economic data is broadly positive, markets remain concerned about the prospect of inflation as well as the potential for a trade war between the US and China. Shares continued to sell off in March as investors favoured bonds, property and defensive sectors. The US economy is maintaining momentum and measures of underlying price inflation are gradually moving higher, but signs of imminent wage inflation have not yet materialised.
The prospect of a trade war has been the cause of some consternation for markets over the past month, with China announcing a retaliatory 25% levy on a range of US products, including soybeans, cars and whiskey. While US steel and aluminium hardly represent the new economy, it is the response from US trade partners that poses the greatest uncertainty.
Despite stronger than expected growth throughout the eurozone, the ECB kept its key interest rates on hold in March, although notably dropping its usual commitment to increase the size of quantitative easing if the situation deteriorates.
Economic data for the early part of 2018 has been mixed, with manufacturing PMIs failing to break out of the low 50s, while exports, industrial production and retail spending data have surprised on the upside.
Although headline GDP growth numbers in Japan have been low in absolute terms, by Japanese standards they have been solid, resulting in a narrowing of the output gap. Japan’s Q4 GDP growth of 1.6% year-on-year is the 16th quarter of positive growth, but there have been a number of misses along the way.
Despite leaving the cash rate on hold at its March meeting, the RBA continues to expect labour markets to tighten globally, and for central banks to get on the front foot by withdrawing stimulus. In its statement, the RBA mentioned the market’s concerns about US trade policy and its contribution to heightened volatility. The RBA and Treasury both expect GDP growth to be in excess of 3% over the next two years, but monetary policy is still extremely accommodative.
The information contained in this Market Update is current as at 16/04/2018 and is prepared by GWM Adviser Services Limited ABN 96 002 071749 trading as ThreeSixty Research, registered office 105-153 Miller Street North Sydney NSW 2060. This company is a member of the National group of companies.
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