• As mentioned in the last edition of Market Watch, the Reserve Bank of Australia (RBA) cut the official cash rate from 2% to 1.75%, a new all-time low, at their May meeting. The next RBA Board meeting is 7 June 2016.
  • The decision to cut rates was due to recent “information showing inflationary pressures are lower than expected”.
  • In their Statement of Monetary Policy the RBA significantly reduced their inflation forecasts. The forecast for underlying inflation at December 2016 was cut by 100 basis points to 1% to 2% whilst the forecast for the year ending December 2017 was cut by 50 basis points to 1.5% to 2.5%. The forecast for mid-2018 is 1.5% to 2.5%, suggesting further downside risk to the Cash Rate.
  • The 2016/17 Australian Commonwealth Budget was also released in May but had little effect on financial markets.
  • The Budget deficit for 2016/17 is estimated at $A37.1billion or 2.2% GDP. A return to surplus was beyond the forecast horizon but is expected to be in 2020/21.
  • Key policy initiatives included: a 1% cut to the company tax rate for businesses with turnover under $A10m from the 2016/17 income, an increase in the threshold for 32.5% tax bracket and the introduction of a Diverted Profits Tax on multinational companies who move profits offshore.
  • Q1 GDP was released on 1 June 2016 printing at 1.1% per quarter, above the 0.8% per quarter the market expected. The annual rate increased to 3.1% per year. The main driver of this was net exports which contributed 1.1% to annual growth.
  • The unemployment rate was unchanged at 5.7% in April.
  • Employment growth was mildly weaker than expected with 10,800 jobs added compared to the 12,000 expected. The decline in full time employ (-9,300) was masked by a 20,200 increase in part time employment. The participation rate fell by 0.1 to 64.8%.
  • Wages growth was weaker than expected at 0.4% per quarter for Q1 2016 lowering the annual rate to 2.1% per year. This is the lowest recording since the series began and suggests further weakness in income and inflation.
  • In more positive news, on the back of the RBA rate cut the Westpac Melbourne Institute Index of Consumer Sentiment increased to 103.2, the highest it has been since January 2014.
  • Finally, after a month of speculation the Turnbull Government called a Federal Election for 2 July 2016.


United States

  • The US Federal Open Market Committee (FOMC) did not meet in May, with its next meeting scheduled for 14 to 15 June 2016. However there is mounting speculation that they will raise rates, potentially as soon as June, though more likely in July.
  • The unemployment rate remained unchanged at 5.0%.
  • Retail Sales were stronger than expected increasing by 1.3% per month. Sales excluding autos, gas and building materials increased by 0.9% per month, the largest increase in two years. Behind auto sales (+3.2% per month) and gas (+2.2% per month), non-store retailers (mainly online stores) was a strong performer increasing sales by 2.1% per month.
  • GDP growth for Q1 2016 was revised up from 0.5% per quarter to 0.8% per quarter on a seasonally-adjusted-annualised-rate. Upward pressure came mostly from favourable revisions to the inventory and trade components with some gains also in housing and non-residential construction.
  • April headline inflation was above expectation up 0.4% per month. This was largely driven by an 8.1% increase in gasoline prices. Core CPI was in line with expectation increasing by 0.2% per month. This was the result of higher services cost (+0.3% per month) whilst core goods prices were down 0.1% per month. The annual rate of headline CPI increased from 0.9% per year to 1.1% per year in April while Core inflation (ex food and energy) fell to 2.1% per year from 2.2% per year.



  • The European Central Bank (ECB) did not meet in May, with the next meeting scheduled for 2 June, 2016.
  • Q1 2016 GDP data was released for the euro area, increasing at 0.5% per quarter, leaving the annual growth unchanged at 1.5% per year. Germany grew by 0.7% per quarter, while Spain (+0.8% per quarter), Portugal (+0.2% per quarter), France (+0.6% per quarter) and Italy (+0.3% per quarter) all recorded growth. Greece (-0.4% per quarter) recorded negative growth.
  • April CPI for the euro area was recorded at -0.2% per year, unchanged from March. While the first estimate for May showed a slight improvement to -0.1% per year. Despite the rebound in oil prices, softness in food prices continue to hold down inflation. Core inflation was 0.8% per year, up from April’s figure of 0.7% per year.


United Kingdom

  • The Bank of England (BoE) left policy unchanged when it announced its decision on 12 May 2016. However the BoE did reduce its 2016 economic growth forecast from 2.2% per year to 2.0% per year.
  • In the press conference following the meeting Governor Carney stated that “A vote to leave the EU could have material effects on the exchange rate, demand and supply potential,” and consequences “could possibly include a technical recession.” The next BoE meeting is 16 June 2016.
  • CPI data showed inflation increased by 0.1% per month in April, with weakness in clothes and air fares. The annual rate of inflation was lower than expected at 0.3% per year while core inflation was 1.2% per year.
  • In its second release, GDP growth was unrevised at 0.4% per quarter for Q1 2016.



  • The Bank of Japan’s (BoJ) policy board did not meet in May. The next meeting 16 June 2016.
  • The preliminary reading for first quarter GDP was higher than expected at 0.4% per quarter from -0.3% per quarter. Drivers of this were a 0.5% increase in private consumption and 1.4% decrease in business spending.
  • Headline CPI decreased further from -0.1% per year to -0.3% per year over April while the core measure excluding food and energy remained unchanged at 0.7% per year, both well below the BoJ’s 2% target.



The Australian dollar depreciated against all the major currencies in May. The AUD finished down 5.65% against the USD to $US0.7234. This was largely driven by the RBA downgrading their inflation forecast and the USD strengthening on the back of increasing expectations of a Fed rate hike.

The Australian dollar fell against the euro (-2.23%), the sterling (-4.4%), the yen (-1.81%) and NZ dollar (-2.07%) over the month of April.



Commodity prices were mixed in May driven by a strengthening USD and concerns over a potential Chinese credit crisis.

The price of West Texas Intermediate Crude finished the month at $US49.1/bbl, up 6.9%, while the price of Brent was up 4.5% to $US49.89/bbl. Supply side events were the main drivers of this with security concerns in Nigeria and Libya, Africa’s largest suppliers of oil, and the wild fires in Canada being the main catalysts.

Gold (-6.0), Zinc (-0.8%), Copper (-7.5%) Nickel (-10.7%), Aluminium (-7.3%) and Lead (-5.8%) all declined over May.



Australian shares continued to appreciate during May, with the S&P/ASX 200 Accumulation Index adding 3.1%. The market has recovered more than 12% from its February low, and is now trading slightly above end-2015 levels.

Three of Australia’s ‘big four’ banks reported first-half results, which were broadly in line with modest expectations. The Financials sector closed the month 3.3% higher.

A substantial drop in the iron ore price from recent highs resulted in weakness in Australia’s large miners, including BHP Billiton (-7.7%), Rio Tinto (-13.3%) and Fortescue Metals (-12.6%) and led the Materials sector 3.3% lower overall. Various other commodities also traded broadly lower.

The Energy sector fell 1.9%, as it took a breather following a strong run in recent months, despite the oil price rising by around 5%.

The Australian dollar weakened following the RBA’s interest rate cut in early May. This provided support for the Health Care sector (+9.4%). Companies such as CSL (+10.1%), Cochlear (+11.7%) and ResMed (+9.4%) derive a significant proportion of their earnings from overseas. A lower interest rate also increased the attractiveness of higher-yielding sectors, including Telecoms (+5.0%) and Utilities (+2.6%).



A 0.25% cut in Australian interest rates in early May provided support to income-producing investments such as A-REITs and helped propel the S&P/ASX 200 Property Accumulation Index 2.6% higher over the month.

The first equity raising of the year was completed in the listed property sector, with Charter Hall Group (+10.0%) raising an additional $600 million to finance the acquisition of a Sydney office building and some automotive assets.

Shopping centre operator Westfield Corporation (+6.1%) announced it will maintain a primary listing in Australia, following speculation that the company could delist from the ASX. Australian dollar weakness supported sentiment towards the stock as Westfield derives the majority of its earnings offshore.

Domestically-focused shopping centre operators including Shopping Centres Australia (-3.4%), Vicinity Centres (-1.8%) and Scentre Group (-0.6%) performed less well after Q1 earnings releases in the sector highlighted a slowdown in retail sales.

Offshore property markets remained flat. For a second consecutive month the FTSE EPRA/NAREIT Global Developed Index returned 0.0% in US dollar terms. Continental European REITs were the top performers in May.



Global financial markets were mostly positive throughout May. With the exception of the UK and Hong Kong, most major equity markets recorded gains over the month.

The main drivers this month were concerns over weakness in China and increasing speculation of an imminent rate hike by the Fed. While renewed concerns over the impact of the UK referendum weighed on European markets.

The MSCI World Index rose by 0.2% in US dollar terms in the month of May and 5.27% in Australian dollar terms.

In the US, the S&P500 (+1.5%) and the Dow Jones (+0.1%) and NASDAQ (+3.6%) rose in May. In a reversal of last month, MSCI Information Technology (+4.44%) was the best performer in May, while MSCI Materials (-4.32%) and MSCI Energy (-2.85%) were the worst performers.

Equity markets in Europe were mixed. The German DAX (+2.2%), Spain (+0.1%) and France (+1.7%) all rose. Whilst the UK FTSE 100 (-0.2%) and the Italian FTSE MIB (-3.1%) were down 0.2%.

Asia also saw mixed results with the Japanese Nikkei 225 (+3.4%) and Taiwan (+1.9%) were up, while Honk Kong Hang Seng (-1.2%) and Singapore (-1.7%) declined.



Emerging market equities were down in May with the MSCI Emerging Market Index down 3.9% in US dollars.

The stronger USD and declining commodity prices drove some markets with the Latin American region recording the greatest falls. MSCI EM Latin America fell 11.07%, once again driven by Brazil (-10.1%), the MSCI EM Europe, Middle East and Africa was also down 8.07% in US dollar terms.

MSCI Asia Ex Japan was down 1.61%, with weakness in the Shanghai Composite Index (-0.7%).


SOURCE: Colonial First State. This information is current at 10th June 2016 but is subject to change.

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