Economics overview

• Australia: The Reserve Bank of Australia (RBA) Board meet on 1 November 2016, as widely expected, the cash rate was held unchanged at 1.5%.
• The statement remained largely similar to the October statement, with inflation still described as “quite low” and “…expected to remain low for some time.”
• The RBA did however, tilt slightly dovish on the commentary around the labour market, noting that “employment growth overall has slowed”. This was slightly tempered by the observation that “forward-looking indicators point to continued expansion in employment in the near term.”
• The statement also suggests little chance of changes to the forecast in the Statement on Monetary Policy, due Friday – “The Bank’s forecasts for output growth and inflation are little changed from those of three months ago.”
• Policy guidance was left unchanged from October – “the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time”
• Q3 16 Consumer Price Inflation (CPI) data was released and was slightly above consensus estimates. Headline CPI rose 0.7%/qtr and 1.3%/yr, from 1.0%/yr in Q2. Key drivers included increases in fruit (+19.5%/qtr), vegetables (+5.9%/qtr) and electricity (+5.4/qtr) prices, this was partly offset by falls in telecommunication equipment and services (-2.5%/qtr) and fuel (-2.9%.qtr).
• Underlying inflation, the RBA’s preferred measure rose to 0.4%/qtr, slightly down from 0.5%/qtr in Q2 16. The annualised rate fell slightly to 1.5%/yr from 1.6%/yr. Both measures of inflation are still below the RBA’s 2-3% target band
• The September labour market report showed the unemployment rate decreased by 0.1% to 5.6%, driven by a 0.2% fall in the participation rate to 64.5%. The number of people employed fell by 9.8k below the +15k expected. The decrease was entirely driven by full time employment (-53k) while part time employment rose (+46k), continuing the recent trend towards flexible and part-time employment.
• Consumer confidence increased over the month with the index up 1.1%/mth to 102.4. The largest gains were seen in the Economy 1 year ahead (+5.8%) and consumer sentiment (+1.1%) components.
• US: The US Federal Open Market Committee (FOMC) meet on 1-2 November 2016 and as widely expected left the official Fed Funds target rate unchanged at 0.25%-0.5%. While the November meeting was never considered “live” given its proximity to the US Presidential Election, markets and ourselves continue to expect a rate increase at the 13-14 December FOMC meeting.
• In detailing the policy decision, the Fed statement was little changed from that released at the time of the September FOMC – with the Fed continuing to signal that a rate hike at the 14 December FOMC is the base case.
• The Fed’s statement repeated the view that “near-term risks to the economic outlook appear roughly balanced” and that they will continue “to closely monitor inflation indicators and global economic and financial developments”. Given this, the Fed noted that “the Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being to wait for some further evidence of continued progress towards its objectives.”
• On inflation the Fed upgraded their commentary a little, stating that inflation “has increased somewhat since earlier this year but is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports” and that “market-based measures of inflation compensation have moved up but remain low.”
• The first estimate of Q3 16 GDP was released at 2.9% on a seasonally-adjusted-annualised-rate, better than the 2.6% expected and an improvement on 1.4% in Q2 16. The better than expected print was helped by a recovery in net exports and an increase in soy bean exports (US$38bn annualised rate) which contributed 0.9% to the headline figure.
• Growth in Q3 saw a slowing in domestic demand with consumption (+2.1%, down from 2.7% in Q2), business capital spending (+1.1%) and government spending (+0.5%) all weak or slowing.
• Employment was slightly weaker than expected in September increasing by 156K, but still more than enough to cover the estimated natural increase in the labour force (~90k). Despite this, the unemployment rate increased to 5.0%, from 4.9% driven by a 0.1% increase in the participation rate to 62.9%. This increase in the participation rate suggests that there is still some excess slack in the labour market which may not be picked up by the unemployment rate and should encourage the Fed to run the economy a little hotter.
• Average hourly earnings data for September was weaker than expected at 0.2%/mth, the annual rate increased to 2.6%/yr from 2.4%/yr in August.
• Inflation as picked up slightly. Headline CPI was up 0.3%/mth in September with the annual rate increasing to 1.5%/yr. Core CPI increased 0.1%/mth with the annual rate falling 0.1% to 2.2%/yr. Inflation continues to be driven by shelter and medical costs, with energy (+2.9%/mth) also contributing to the increase in headline CPI.
• The Fed’s preferred measure of underlying inflation, the Core Personal Consumption Expenditure, was stable at 1.7%/yr in September, around the level is has remained for most of 2016.
• Europe: The European Central Bank (ECB) meet on 20 October 2016 and left monetary policy unchanged, as largely expected.
• ECB president Draghi dampened expectations that asset purchases would be tapered and reiterated the forward guidance that QE would continue at the monthly pace of EUR80bn until there was a sustained increase in the path of inflation consistent with the ECB’s objective.
• The market is expecting an extension of the ECB’s QE program which is due to end in March 2017 at the December meeting.
• The first estimates of CPI for the euro area in October showed an increase of 0.5%/yr, the fastest since 2014. Core CPI was stable at 0.8%/yr still well below the ECB’s 2% target. Inflation was aided by the increase in oil prices over the last year with energy prices down -0.9%/yr in October compared to -3%/yr in September. Services remain the main driver of inflation at +1.1%/yr.
• The political deadlock in Spain ended over the month with Mariano Rajoy of the centre right Peoples Party sworn in a PM after winning a confidence vote, ending a 10 month period with no government.
• UK: The Bank of England (BoE) Monetary Policy Committee (MPC) did not meet in October, the next meeting is scheduled for 3 November 2016.
• Over the month it was confirmed that the BoE governor Mark Carney would leave his role in 2019, before the end of the full 8 year term (2021), but long enough to see the UK through the Brexit. The decision appears to be due to personal/family reasons and not political pressure as speculated.
• Q3 2016 GDP was better than expected increasing by 0.5%/qtr with no sign yet of a “Brexit” slowdown. The annual rate increased to 2.3%/yr. Growth was entirely driven by service (+0.8%/qtr), while industrial production (-0.4%/qtr) and construction (-1.4%/qtr) slowed.
• CPI data showed inflation increased by 0.2% in September, driven in part by rising oil and core goods inflation. The annual rate of inflation increased to 1.0%/yr from 0.6%/yr while core inflation increased to 1.5%/yr from 1.3%/yr. Rising oil prices and a lower currency are expected to continue driving inflation higher over the next year.
• NZ: The Reserve Bank of New Zealand (RBNZ) did not meet over October, the next meetings will be 10 November 2016.
• Q3 16 CPI was stronger than expected at 0.2%/qtr and 0.2%/yr, down from 0.4%/yr in Q2 16 and still well below the RBNZ’s target of 1-3% on average over the medium term.
• Canada: The Bank of Canada (BoC) left rates unchaged at 0.5% at their 20 October 2016 meeting.
• September CPI increased by 0.1%/mth while the annual rate rose to 1.3%/yr from 1.1%/yr. Core inflation was stable at 1.8%/yr.
• Japan: The Bank of Japan’s (BoJ) meet on 1 November 2016 and left monetary policy unchanged as widely expected.
• China: The People’s Bank of China (PBoC) left monetary policy unchanged during the month with no rate cuts or reserve requirement ratio easing.
• Q3 16 GDP released in October showed growth once again stable at 6.7%/yr, the middle of the 6.5%-7% target band where it has remained for all of 2016.
• Inflation increased in September for the first time since February, rising to 1.9%/yr from 1.3%/yr in August. Food price inflation continues to be the major driver of inflation, rising to 3.2%/yr in September from 1.3%/yr in August.
• Chinese producer prices as measured by the PPI increase 0.1%/yr in September, the first increase since 2012 and up from -5.9%/yr one year ago.

 Australian dollar

• The Australian dollar strengthened against most major currencies over October. The AUD was down 0.7% against the USD to $US0.7608, but rose against the euro (+1.85%), the sterling (+5.42%), yen (+2.90%) and NZ dollar (+1.18%),
• Improving commodity prices and terms of trade over the month supported the currency.

Commodities

• Commodity prices were mixed over October with metals varied and weakness in energy, except coal which saw significant increases.
• The price of West Texas Intermediate Crude finished the month at $US46.86/bbl, down 2.9%, while the price of Brent was down 4.2% to $US48.61/bbl. Oil prices rose early in the month, around optimism that a potential OPEC deal would reduce excess supply. Before falling in the last week of October as the market realised any production cuts would be difficult to achieve and would likely exclude key OPEC producers (Iran, Iraq, Nigeria and Libya).
• Increasing activity in the US energy sector also weighed on markets with US rig counts now up nearly 40% from the lows reached in May this year.
• Gas prices were mixed with the US Henry Hub spot price down 7.9% to $US2.79/MMBtu while the UK natural gas price was up 18.5% over August.
• Iron ore prices were stronger over October, up 15.3% to $64.38/metric tonne, as measured by the benchmark price of iron ore delivered to Qingdao China, the highest level is May 2015.
• Coal was the best performing commodity over the month with increasing demand from China, due to domestic mine closures, pushing prices higher. The price of Newcastle thermal coal increased 50.4% to $108.6/metric tonne over the month.
• Zinc (+3.4%) and Aluminium (+3.6%) rose over October while Nickel (-0.9%), Lead (-2.8%), Gold (-3.3%) and Copper (-0.2%) were all weaker.

Australian equities

• The ASX/S&P 200 Accumulation Index lost 2.2% during October, with most industry sectors finishing the month lower. Health Care (-8.3%) was among the worst performers, dragged lower by industry heavyweight CSL.
• Bond proxy sectors continued September’s decline, as the market reacted to rising bond yields and a potential rise in US interest rates. AREITs (-7.9%) and Utilities (-3.0%) once again underperformed the broader market.
• Energy (-2.3%) started the month strongly, but finished lower as doubts surfaced around OPEC’s commitment to cut production. Whitehaven Coal had another strong month on the back of rising coal prices, adding to the 333% share price appreciation since the start of 2016.
• Materials (1.3%) outperformed the market with strong performances from Fortescue Metals and Rio Tinto, which benefitted from a strengthening iron ore price.
• Financials (0.7%) edged higher, led by banks as sentiment towards the sector improved. Banking stocks typically enjoy investor interest during October, as three of the big four banks go ex-dividend in the first half of November.

Listed property

• The S&P ASX 200 A-REIT index continued its recent decline, falling by -7.9% in October. Higher bond yields dampened sentiment towards REITs and other income-oriented investments.
• Office A-REITs held up relatively well on the view that robust leasing demand from the financial services, legal and technology sectors would support Sydney and Melbourne’s office markets.
• The best performing A-REITs were Charter Hall Retail REIT (-1.9%), which stabilised following steep declines in August; and Dexus Property Group (-2.3%), which held an investor day and provided a first quarter update.
• The worst performing A-REITs were Iron Mountain (-12.1%) and Scentre Group (-10.4%). Although neither company announced material news, broader sector underperformance weighed on both stocks.
• Listed property markets offshore also dipped in October. The FTSE EPRA/NAREIT Developed Index (TR) fell by -5.7% in US dollar terms. Despite ending the month lower, Hong Kong (-1.3%) was the best performing region for a third consecutive month, followed by Japan (-1.4%).  Property securities in Continental Europe and the UK lagged.

Global developed market equities

• Global equity markets were mixed over October with weakness in the US and strength in Japan and European peripheries. Volatility continued over the month as markets reacted to changes in the oil price, political concerns in the US and the prospect of a Fed rate hike in December.
• The MSCI World Index was down 2.0% in US dollar terms in the month of October and -1.3% in Australian dollar terms.
• In the US, the S&P500 (-1.9%), the Dow Jones (-0.9%) and the NASDAQ (-2.3%) were all weaker, driven by broad market weakness. While earnings largely beat (reduced) expectations, the results were more “less bad” than good.
• US markets also stumbled at the end of the month as it was revealed the FBI had found more Clinton emails in a separate investigation.
• On a sector basis, MSCI Financials (+2.13%) was the best performer, as bank stocks climbed with rising yields. MSCI Health Care (-6.94%) was the worst performer as political noise around drug pricing and earnings concerns of medical device companies carried over to the rest of the sector.
• Equity markets in Europe were stronger over the month. The large cap Stoxx 50 Index rose 1.8% driven by strong performance in the periphery, with Greece (+4.5%), Italy (+4.4%) and Spain (+4.1%) all stronger. Elsewhere the UK FTSE100 (+0.8%), France (+1.4%) and the German DAX (+1.5%) all rose.
• Asia markets were mixed with the Japanese Nikkei 225 (+5.9%) and Taiwan (+1.3%) up while Singapore (-1.9%) and Honk Kong’s Hang Seng (-1.6%) fell.

Global emerging markets

• Emerging market equities were almost flat over October in USD terms with the MSCI Emerging Market Index up 0.2%, outperforming DM equities.
• Despite the 3% rally in USD index and higher US yields emerging markets performed well in local currency terms aided by the pick-up in key commodity prices.
• MSCI EM Latin America was the best performing region over the month rising 9.72% in USD terms with a strong rebound in Brazil (+11.2%) driven by positive political developments
• MSCI EM Europe, Middle East and Africa (-0.28%) and MSCI EM Asia (-1.54%) underperformed.
• The Shanghai Composite Index was stronger, up 3.2% on stable Chinese growth and stronger  domestic consumption.

Global and Australian developed market fixed interest

• The month of October saw a global move higher in bond yields, on the back the growing consensus that global monetary policy may be reaching the end of its effectiveness. The market’s focus has subsequently shifted towards the time when stimulus may begin to be reduced from current levels, even though central banks have not announced any such plans at this stage.
• Key contributors to bond market moves over the month included the expected Fed rate hike in December, uncertainty over Brext (which drove weaker UK bond prices) and the movements in the oil price.
• The Australian bond market followed the lead from offshore, with yields rising strongly over the month. However, domestic influences were also a driver of this move, as evidenced by the larger move in Australian yields over their US equivalents. In particular, the new RBA Governor Phil Lowe’s emphasis on the flexibility of the central bank when looking at inflation suggested that further rate cuts are now less likely even if the inflation outlook is lower than forecast.
• The biggest moves in 10-year yields were in the UK (+50 bps) and Australia (+44 bps) with Germany (+28 bps) and the US (+23 bps) still posting solid rises. Japanese 10-year yields rose a smaller 4 bps reflecting the cap at 0% that the Bank of Japan implemented as part of its yield-curve focussed monetary policy strategy.

 Global credit

• Despite the notable sell-off in government bond yields, credit spreads moved little in the month. Demand for spread product remains favourable buoyed by accommodative global monetary policy and low issuance. Geopolitical events risk and uncertainty over the growth outlook are keeping spreads range bound as supply is subdued as companies are hesitant to invest (and hence issue debt to fund investment). As with government bond markets, credit markets are likely to see increased volatility in the run-up to Election Day in the US. Despite continued oscillations in oil prices credit spreads largely moved sideways with a small tightening in both physical and synthetic credit indices.
• Specifically the Barclays Global Aggregate Corporate Index average spread moved 6 bps tighter to 1.28%. The US and European spreads also moved 6 bps narrower with the Barclays US Aggregate Corporate Index average spread down to 1.25% and the Barclays European Aggregate Corporate Index to 1.09%.
• At the end of the month ratings agency S&P put a number of non-major bank Australian lenders on negative outlook, on the back of concerns the overinflated property market may give way for a sizeable correction. This follows the major banks and Australia’s sovereign ratings outlook both being moved to negative earlier in the year.
• Following notable tightening in Australian credit spreads last month, there was little movement intra-month in the average spread (relative to bond) of the Bloomberg AusBond Credit Index. This series closed as it opened at +107 bps. Issuance in Australian credit was subdued, although there was some longer-dated non-financial corporates which were readily absorbed by the market.