The Australian Budget was released last week with more stimulatory measures and less of the punitive policies that marked the tenure of Prime Minister Abbott. Very much in the mould of an “election Budget” with notable winners including consumers with personal income tax cuts as well as small businesses with the extension of tax breaks on capital spending and health care with the announcement of a $1.3bn plan to support Australia as a “global leader” in medical technology and pharmaceuticals.
The US unemployment fell to a new low of 3.9% below consensus forecasts of a 4% rate for April, down from 4.1% in March. This marked the lowest unemployment rate in almost 18 years while non-farm payrolls i.e. employment figures grew by 164,000. Importantly for monetary policy, the growth rate of average hourly earnings remained unchanged at 2.6% belying the expected increase by economists. US inflation data for April disappointed slightly with core CPI rising 2.1% year-on-year slightly below forecasts of a 2.2% rise but in line with March growth of 2.1%.
The Bank of England left interest rates unchanged at 0.5% in its May meeting following on from the release of weaker economic data in recent weeks. The Bank also lowered its growth forecast for 2018 down to 1.4% from its February prediction of 1.8% due to the economic disruption caused by bad weather in March with Governor Carney reiterating his view that rates are likely to rise this year given the resilience of the “underlying pace of growth”.
A positive week across major markets with the ASX200 up over 1% while US, European and Asian markets also closed in positive territory. A catalyst for the positive US performance was the weaker inflation print which toned down expectations of the Federal Reserve being pressured to hike interest rates more than it has guided to date. The Australian market benefited from strength in the Energy sector driven by rising oil prices as well as Budget wins for the healthcare sector.
Oil prices rose on the back of the breakdown of the Iranian nuclear deal with the Trump administration adopting a hawkish stance against Iran and withdrawing the US from the treaty. The fear is that this withdrawal will be followed by more detailed sanctions against Iran, withdrawing their production from the global oil supply. These sanctions have already begun with the targeting of Iranian persons and companies tied to terrorism funding. In addition, last week saw some direct military exchanges between Israel and Iran with Israel launching airstrikes against Iranian targets in Syria following a rocket attack on their forces in the occupied Golan Heights territory. This contributed to fears for further escalation in the region and disruption of oil supply, also helping to drive prices higher. Precious metals rose on the back of lower US inflation pressures which lower the risk of aggressive interest rate policy by the Federal Reserve which would make gold a more unattractive safe haven asset as it does not generate income unlike US Treasury bonds. The Australian dollar traded flat this week, slightly up and slightly down against its major trading partners while the US Dollar continued to benefit from the relative strength of its economy against the UK and European economies.