Economic activity trackers

Our Australian Economic Activity Tracker fell slightly again over the past week reflecting falls in confidence, mobility and restaurant bookings on the back of flooding in NSW and Queensland. It remains strong though. Our US Economic Activity Tracker pushed a bit lower, but our European Tracker was little changed despite the war. A further impact from the war is likely as high energy prices impact.

Major global economic events and implications

US inflation is up to a new 40 year high. CPI inflation rose again to 7.9%yoy in February with inflation excluding food and energy rising to 6.4%yoy. This was broadly as expected reflecting ongoing supply-side pressures and is consistent with the Fed starting to raise interest rates in the week ahead. Meanwhile, job openings and people quitting their jobs fell slightly but remain very high as does the ratio of job openings to unemployment indicating a very tight labour market.

Japanese economic sentiment fell slightly in February according to the Economy Watchers survey, with this likely reflecting a surge in covid cases at the time. Producer price inflation accelerated again to 9.3%yoy after slowing in January and wages growth picked up but only to 0.9%yoy.

China saw stronger than expected growth in exports and imports in January and February, flat consumer price inflation at just 0.9%yoy and a slowing in producer price inflation to 8.8%yoy. Unlike many other countries China does not face an inflation constraint to stimulating growth and with the Government setting an above consensus 2022 growth target of 5.5% more proactive policy stimulus looks to be on the way.

Australian economic events and implications

Australian economic data was mixed. The NAB business survey reported a rise in business conditions and confidence but this relates to February as the Omicron disruption receded. Against this, consumer confidence fell in March according to the Westpac/Melbourne Institute survey reflecting the more recent bad news on interest rates, floods, the war in Ukraine and petrol prices.

More jobs

ABS payroll jobs continued to rise into February as part of a normal seasonal rebound along with recovery from the Omicron disruption in January, but wages data rose a lot faster reflecting a rebound in hours worked and compositional shifts along with possibly higher wage rates.

...But higher prices

Ongoing inflation pressures were highlighted by the NAB survey which showed ongoing elevated readings for labour costs, purchase costs and selling prices, consistent with March quarter inflation likely to again surprise the RBA on the upside.

Outlook for investment markets

Shares are likely to see continued volatility this year as the Ukraine crisis continues to unfold and inflation, monetary tightening, the US mid-term elections and geopolitical tensions with China and maybe Iran impact. However, we still see shares providing upper single-digit returns this year as global recovery continues, profit growth slows but remains solid and interest rates rise but not to onerous levels.

Still-very low yields and a capital loss from a rise in yields are likely to again result in negative returns from bonds this year.

Unlisted commercial property may see some weakness in retail and office returns, but industrial property is likely to be strong. Unlisted infrastructure is expected to see solid returns.

Australian home price gains are likely to slow further with prices falling later in the year as poor affordability, rising mortgage rates, reduced home buyer incentives and rising listings impact. Expect a 10-15% top to bottom fall in prices from later this year into 2023-24 but large variation between regions. Sydney and Melbourne prices may have already peaked.

Although the AUD could fall in response to the uncertain global outlook, a rising trend is likely over the next 12 months helped by strong commodity prices, probably taking it to about $US0.80.