For the quarter ended February 2017
As we move into March, political attention is likely to shift from the US to Europe. Economically however, the US should remain a focus:
Even before Trump’s “Make America great again” pledge, United States manufacturing was doing well and manufacturing data globally has also been improving. In the US, fiscal policy implementation is now required to reinforce the positive sentiment and drive further gains.
In Europe, accommodative monetary policy remains the main economic driver and is at last delivering. Manufacturing growth in January was the best monthly gain since April 2011. This was accompanied by the best employment gains in nine years, as hiring accelerated in both the manufacturing and services sectors, driven by a sustained growth in new orders.
Japan’s manufacturing sector also grew in January at its sharpest rate in three years. Both production and new orders expanded at a robust pace, with a large part of new orders driven by foreign demand.
Figure 1. Global manufacturing indices
Source: Forsyth Barr analysis, Yardeni Research
Improving global growth has been reflected in very healthy returns from equities over the last quarter, with the implications of President Trump’s fiscal expansionary policies further emboldening investors. Forward earnings expectations have lifted, with some of the benefits of tax cuts and a reduced regulatory burden being key drivers. Sectors that have benefited have included Financials, Industrials and the Energy sector.
In Australasia, Australian equities outperformed New Zealand over the last quarter. Australia has benefited from the rebound in the Resources and Financials sectors, while New Zealand’s market is still regarded as dominated by companies that are considered to be interest rate proxies. These companies are less attractive in a rising interest rate environment. The reporting season in New Zealand also disappointed as cyclicals dominated downgrades at the operating earnings line.
While it is now likely that the US Federal Reserve could raise rates as early as this month, the Reserve Bank of New Zealand is still expected to keep interest rates on hold.
This is reinforced by the current Governor (stepping aside in September 2017) and the Bank consistently reiterating that no move is expected before 2019. In addition, while New Zealand’s core inflation rate has picked up, it is not expected to reach its 2.0% target until late 2018.
New Zealand’s longer-term interest rates however, are 90% correlated to US interest rates. These are therefore likely to be driven by the US outlook. Accordingly, the change in interest rates over the last three months is expected to reflect a pause, rather than indicate a change in the outlook for higher longer-term interest rates in a years’ time.
Figure 2. US Federal Reserve probability of increasing rates
Source: Forsyth Barr analysis, Bloomberg
* 25 bp (basis points) is equivalent to 0.25%
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