This roundup has been provided by Christopher Lioutas who is Director of Insight Investment Consultants. Chris is a member of the Quill Group Investment Committee as an external consultant.

Economic Update

The value of Australian retail trade rose strongly in March, surging by 8.5%, which was the strongest monthly rise on record. Spending on food and household goods was incredibly strong, with eating out, clothing, and department stores incredibly weak. The problem is in the rush to hoard and work from home, we got gouged: Retail trade volumes are only marginally positive, so we paid a lot more for the same goods we always buy under the guise of limited supply.

The Australian unemployment rate rose to 6.2%, coming in much better than expectations. The problem is the headline number doesn’t come close to telling the real state of affairs. The participation rate (those in work and those actively looking for work) fell through the floor as almost 500,000 left the labour force, thus masking a much higher unemployment number, which would’ve been above 9% had the pre-virus participation rate been used.

Around 1 in 5 employed people have either left employment or had their hours reduced, with the underemployment rate rising almost 5% to 13.7%.  Absent JobKeeper and JobSeeker, the numbers would be even worse (circa 15% plus unemployment).

The RBA is forecasting a sharp drop in economic growth this year before a rather sharp rebound in ’21 and ’22. The sharp rebound is anyone’s guess right now. They also have inflation remaining low and below target out to ’22 which means we won’t see any upward pressure on rates until at least 2023. Lastly, they are forecasting a sharp rising in unemployment to 10% this year, with falls back down to 6.5% in 2022. The unemployment rate was 5.2% pre-virus.

US jobs data continues to worsen with more than 36 million now having filled claims for unemployment benefits. The unemployment rate rose to almost 15% and that was with the participation rate falling, which means the unemployment rate is much worse than the 15% suggests. Analysis shows that 40% of households earning less than $40,000 a year lost a job in March.

The US central bank chairman Jerome Powell has maintained that negative interest rates aren’t being considered. This is in stark contrast to market pricing which is implying that the bank will cut rates to below zero next year. The Australian central bank chair has also maintained that negative rates aren’t being considered, but chairs are in a position to rule anything out right now.

Chinese data showed a sharp drop in their factory prices, which was to be expected. Whilst factories are back almost full capacity, limited to no demand from the West (given we’re still in lockdown) will result in massive amounts of supply unless factory output is curbed. Problems for China.

Political Update

Anti-China rhetoric ramped up geo-political risks this week, with China threatening, and in some cases carrying through, with the threats to boycott Australian barley and meat. Education could be next.

US President Trump ramped up his anti-China rhetoric by asking the federal pension fund to exclude Chinese equities from its holdings and pushing the securities regulator to look at banning and potentially removing Chinese listings on US stock exchanges. Whilst abandoning the phase 1 trade deal looks unlikely, President Trump has asked for ways to raise tariffs without breaking promises in the trade 1 deal. He may also be looking at strict enforcement of the phase 1 deal which would be significantly difficult for China to meet without hurting their economy.

In contrast, China is opening up its financial markets further to foreign investors and trade talks between US and Chinese officials have begun and look relatively healthy at this point. China might be playing hardball on the anti-China front, but they will need to significantly open their economy and their financial markets ahead if they are to prosper and meet their targets.

Countries that have begun to re-open have reported an increase in new Covid-19 infections. This is to be expected. The virus can’t and won’t disappear. Even a vaccine won’t assist as vaccines aren’t mandatory and vaccine safety takes considerable time to achieve. The actions of governments are now even more critical – ie. if they stall the re-opening, or go back to lockdown, no amount of stimulus will stop the economic carnage that will take place.

Summary

What does all this mean for investors?  Our views have not changed at this time: Stay invested, expect some short-term volatility, but be cautiously optimistic and focus on the long-term.

If you have any questions or would like further information, please contact your relationship manager.

You can view more of our market updates here.