Financial Market Conditions
Global financial markets were relatively stable over the past month with trade tensions between the US and China remaining the only real point of friction.
Trade tension between the US and China simmered over the past month with reports of different parts of the US economy benefiting and suffering as a result of trade tariffs. In early July, the US unemployment rate unexpectedly rose from 3.8% to 4% but after further analysis, many interpreted the result as positive as the rise was caused by an extra 600,000 people entering the workforce. Late in the month US gross domestic product (GDP) increased from 2.2% to 4.1% in the second quarter of 2018. While the result was in line with market expectations, equity market and bond yields were buoyed by the result highlighted by US 10-year bond yield rising around 0.10% over the month in question.
The European central bank left monetary policy unchanged at its July meeting. After the meeting the ECB Governor Mario Draghi, re-affirmed to the market that their quantitative easing program will cease at the end of 2018. Late in the month the Eurozone unemployment rate held steady at 8.3% remaining at its lowest level since the start of the GFC.
Australian financial markets were also relatively stable over the past month. Australian gross domestic product (GDP) data for March, released early in the month, saw the year on year figure rise from 2.4% to 3.1%, which was above market expectations.
Later in the month, Australian consumer price index (CPI) data grew 0.4% in the three months to June, pushing the year on year figure up 0.2% to 2.1%. The Australian dollar remained relatively static over the past month and is currently trading at $0.74 USD.
The Reserve Bank (RBA) met in early July and left the official cash rate unchanged at 1.5%. In the statement that accompanied the decision, Governor Lowe noted that higher commodity prices have provided a boost to the economy. The labour market remains positive and that a gradual decline in unemployment is expected. He also noted that wage growth remains low and that while inflation is also currently low, the Reserve Bank expects it to move gradually higher over the coming year. The Governor also noted the moderation in housing prices and the decline in housing credit growth. Current interest rate futures market pricing predicts that the cash rate will be on-hold for at least the next 12 months.
Implied RBA Cash rate as at 31/07/2018:
A recent survey highlighted that business conditions in South Australia lead the nation, on the back of a “mini mining boom” and resilient local housing market. South Australia’s business conditions index held firm this month ahead of every other state as other states faced falling house prices and a challenging retail environment.