Australian Economy – A surprise victory for Scott Morrison saw the rejection of Labor's tax policies. The stock market reacted positively to this outcome, even though economic dark clouds had been growing. Unemployment jumped back up to 5.2%1, even with exports running at all time highs and twice as much as was sent abroad just 10 years ago.
Global Economy – A further drop in the US unemployment rate was a bright star in an otherwise worrying month of data out of the world's largest economy. Industry activity has started to slow, and even decline in some sectors. Retail sales is down, while economic growth was revised downwards1. The trade deficit hasn't benefited from Trump's trade wars and the federal budget deficit is running at worrying levels. All of this was highlighted in bond markets, with the US yield curve spending much of the month of May inverted (a warning sign of impending recession).
Investment Markets – Markets struggled as fears of recessionary pressures and trade war rhetoric increased. Australian equities, however, were mainly immune to the market drawdown due to the removal of post-election uncertainty. Japan, China and Hong Kong were some of the worst performers, all down over 7% for the month. Europe and the US were down about 6.5%, whilst Australian equities finished up over 1%2.
Outlook – The Sino-US trade war continues to threaten the global economy, including Australia. More worrying, though, is the growing potential for recession in the US and the ramifications of this on equity markets. Governments and central authorities do have some policy levels to pull to help buffer us from the worst of an economic downturn, but low interest rates and budget deficits will limit this firepower.
S&P/ASX 200 – 12 months to 31 May 2019
Source: Core Equity Services
Footnotes: 1. TradingEconomics; 2. Bloomberg data .