The Reserve Bank held interest rates steady at 1.50% in its Tuesday meeting last week in line with market expectations heading into the session. The mantra remains steady with the need to see wage growth precursor to any future rate hikes. Some economists have noted that the change in phrasing in this latest statement may be setting the ground for revising its economic growth outlook for 2018 downwards. Market expectations for the next rate hike are not material into late next year and with the current economic backdrop of low inflation, low wage growth and high household debt that may prove to be optimistic. ABS data releases revealed a slowing of unit approvals for the fifth consecutive month in February while house approvals have grown albeit at a slow pace over the same period. Unit approvals remain well-elevated above their historical averages and have done so since the global financial crisis as Sydney and Melbourne especially, and Brisbane to a lesser extent, have overseen an unprecedented boom in unit construction. Retail sales figures for February showed an improvement in total sales by 0.6% on January performance (consensus: 0.3%). This follows an upwards revision of January growth to 0.2% from December 2017. If confirmed by positive data in March this should point to household consumption adding to economic growth over the March quarter. This is noteworthy as household consumption accounts for almost 57% of annual GDP in Australia.
Market volatility was still with us this week, but shares ended on the positive with the ASX200 and S&P500 rising by 0.6 and 0.8 per cent respectively after a shaky start to the week. One key driver was a reversal in the technology sell-off as investors took comfort that Facebook amidst its privacy scandal had still retained both advertisers and users with campaigns such as #DeleteFacebook failing to harm the social media giant substantially. The other factor was an eventful week for trade policy with tariffs and counter-tariffs lobbed between the United States and China. The latest such example was a U.S. counter to China’s retaliatory measures to the tune of hitting $100bn of Chinese imports. These concerns did not stick with the markets this week taking the view that much of these measures represented negotiating bluster as the U.S. seeks to strengthen its negotiating position with the prospect of any growth-damaging initiatives a limited one. As such shares continued to rally for the latter half of the week.
Crude oil ended the week lower amidst concerns over signs of growing stockpiles at the key US pipeline hub of Cushing, Oklahoma. This came at the close of a week where oil see-sawed on equity market volatility as investors took differing views on the implications of a trade war between the U.S. and China for economic growth and energy demand. Most industrial commodities rallied as investors gained confidence that the U.S. positioning was posturing that would not hinder global growth prospects. The notable exception is the decline in iron ore prices with inventories at Chinese ports reaching a record high of 161.68 tonnes last week fuelling oversupply concerns.
Bond yields rose this week as concerns of slowing global growth and trade wars abated with the Australian 3-year and 10-year yields rising by 9 and 6 basis points respectively. The acceleration in short-term funding costs highlighted in last week’s report abated with the 90-day bank bill yield only rising 2 basis points.