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The Bank of Japan (BOJ) raised rates 15bps at about the same time that the Federal Reserve Board (FED) indicated that rates would soon be cut. This coincided with a weak US jobs report to shock markets sending the S&P 500 Index down 8% and the Nikkei 18%. Both markets rallied shortly after with the S&P 500 closing up 5% for the quarter. It was the stocks outside the tech sector which pushed markets higher. The NASDAQ index only rose 1% whereas the Dow Jones Industrial Average rallied 8%. The Russell 2000 Index lifted 9% performing better than Australian small capitalisation stocks which underperformed the All Ordinaries Index to climb only 5%. The Australian dollar performance was mixed. It was stronger against most currencies for which their central banks had commenced an easing cycle. Meanwhile, the yen rallied 8% against the AUD. A weak steel market saw iron ore and coking coal decline 13% and 10% respectively. Oil fell 16% and gold rallied 14%! The Australian 10-year bond yield fell to 4.01%, widening its discount to equivalent US treasuries.

 

The FED cut rates by 50bps in September. This was considered consistent with jobs data which pointed to a slowing rate of growth. Further, a run of inflation data supported a view that the economy was back on a disinflationary path. There remains concern among some board members that the economy still retained considerable momentum and that a rate cut would encourage structural inflation over the medium term. Many commentators are calling the ensuing economic outcome a soft landing.

 

A burst property bubble, bulging state debt levels and a lackluster consumer are headwinds for the Chinese government target of 5% GDP growth. In response, authorities have unleashed a raft of monetary measures to further stimulate the economy. These strategies are likely to have a positive initial impact. Nevertheless, they will not solve the structural problem within the Chinese economy. Neither are the measures sufficient in size or composition, at this stage, to escape the current and emerging deflationary vortex.

 

Japanese GDP bounced back from a contraction in March, to rise 3.1% year on year in June. Pay increases and tax cuts have assisted consumption which appears to have some momentum even with higher inflation. The BOJ increased rates to 0.25% and is seeking to halve its bond buying program.

 

The UK economy outperformed Europe. Manufacturing rebounded and the services sector retained momentum. European growth remains sluggish. Looking forward, European inflation is subsiding hinting at further rate cuts which should support the growth outlook. In the UK, inflation is somewhat sticky which could delay further monetary stimulus. The Bank of England (BOE) reduced rates by 25bps to 5.00% and the European Central Bank (ECB) cut the deposit rate by 25bps to 3.5% at its September meeting. Both regions saw their unemployment rates decline.

 

Australian economic growth is largely stagnant. The last few quarterly readings of positive GDP growth were very close to zero. Public sector spending is the driver of growth and employment in the public domain is contributing to a tight labour market. Spending in the public sector sits at around 27% of GDP up from an average level of 23%. This type of growth is contributing to poor productivity and stubborn underlying inflation. The Reserve Bank of Australia (RBA) is likely to remain on hold with monetary settings as demand is greater than supply generating a positive output gap. The absence of effective reform touching the housing market and government interference across energy and labour markets serve to further constrain supply.