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Bloomberg Indices Indices 1 June 2017 //////////////////////////////////////////////// ///////////////////////////////////////////////////////////////////////////////// Bloomberg Indices Month in Review – May 2017 Month in Review ................................ ................................................................ ................................ ................ 2 Australian Market Performance ................................ ................................ ................................ .......................... 6 New Zealand Market Performance ................................ ................................ ................................ ..................... 9 Global Market Performance ................................ ................................ ................................ ............................. 12 Market Yields ................................ ................................ ................................ ................................ ................... 15 Supply ................................ ................................ ................................ ................................ ............................. 21 Maturities and Removals ................................ ................................ ................................ .................................. 23 Index Market Capitalisation ................................ ................................ ................................ .............................. 24 Page 1 Month in Review 1 June 2017 ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// Month in Review Interest Rates On 2 May, the Reserve Bank of Australia (RBA) left the cash rate unchanged at 1.50%. Headline inflation was above 2%, while underlying inflation was about 1.75%. The housing market remained varied across the country. Labour market indicators remained mixed, with both unemployment and employment increasing and slow wage growth. The global economy was also showing a broad-based recovery. The RBA judged the decision to be consistent with sustainable growth and its medium-term inflation target. It also released its May Statement on Monetary Policy (see below). On 11 May, the Reserve Bank of New Zealand (RBNZ) left the NZ official cash rate unchanged again at 1.75%. The upside surprise in March quarter inflation figures was viewed as transitory. However, headline inflation was expected to rise in line with non-tradeables and wage inflation over the medium term, while long-term inflation expectations remained “well-anchored” at 2%. Further, house price inflation had moderated and this was expected to continue. Although a broad-based recovery was apparent in the global economy, challenges included surplus capacity and political uncertainty. On 3 May, the US Federal Open Market Committee (FOMC) held US interest rates unchanged at 0.75% to 1%. Although headline inflation had been running at close to the 2% target, core inflation declined in March and remained below the target, while market-based inflation compensation measures remained low. The FOMC regarded weak first quarter GDP results as transitory. It also stated that it would maintain its existing reinvestment policy from its asset purchase programme “until normalization of the level of the federal funds rate is well under way”. On 11 May, the Bank of England (BOE) voted 7-1 to hold the UK Bank Rate steady at 0.25%. It also voted unanimously to maintain government and corporate bond purchases at £435bn and £10bn respectively. Aggregate demand “slowed markedly” in the first quarter, particularly in consumer-facing sectors, and wage growth had been “notably weaker than expected”, yet business investment growth strengthened. The sterling’s depreciation has caused CPI inflation to rise above 2%, and this was expected to continue and peak at “a little below 3%” in the fourth quarter. The BOE also released its latest May Inflation Report (see below). It reiterated that future interest rate moves would “depend upon the evolution of demand, supply, the exchange rate and therefore inflation”. Additional Highlights On 5 May, the RBA released its latest quarterly Statement on Monetary Policy . Forecasts were broadly unchanged from the February Statement : GDP was forecast at 2% to 3% in 2017 and expected to rise to 2.75% to 3.75% percent in 2018 and mid-2019, having grown at 2.5% in 2016. Unemployment was forecast to remain steady at 5% to 6% through the next two years, while both CPI inflation and underlying inflation were forecast at 1.5% to 2%, before increasing to 2% to 3% by mid-2019. Inflation was expected to be constrained by slow wage growth. Although there were signs of global economic improvements, they could be derailed by geopolitical shocks. Chinese authorities faced a difficult trade-off between supporting GDP growth and a further build-up of financial risks. The adjustment following the end of the mining investment boom appeared to be “well advanced”, as slowdowns in mining states eased. Subsequently, RBA meeting minutes, released on 16 May, stated that the March quarter inflation figure of 0.5% was in line with the RBA’s estimates, and improved its confidence in forecasting underlying inflation to reach 2% in early 2018. Additionally, the “the distinction between full-time and part-time work had become less important in assessing labour market conditions”, as part-time employment remained high despite growth in full-time work. On 9 May, the Australian Government delivered its 2017-18 federal budget. A net operating budget deficit of A$19.8bn (1.1% of GDP) was projected for 2017-18 and A$10.8bn (0.6% of GDP) for 2018-19, but set to return to surplus the next two fiscal years (A$7.6bn and $17.5bn, or 0.4% and 0.8% of GDP, respectively).Underlying cash deficits were projected of A$29.4bn in 2017-18 (1.6% of GDP) and A$21.4bn in 2018-19 (1.1% of GDP), followed Page 2 Month in Review 1 June 2017 ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// by a return to surplus of A$7.5bn by 2020-21 (0.4% of GDP). Net debt was forecast at A$354.9bn (19.5% of GDP) in 2017-18 and expected to increase to A$375.1bn (19.8% of GDP) the next year before declining to 8.5% of GDP by 2027-28. Real GDP growth was projected at 2.75% for 2017-18 and 3% for 2018-19. A major bank levy that affects the big four Australian banks and Macquarie Bank was a surprise measure that is expected to generate A$1.5bn annually. Other key highlights included national infrastructure investment and a corporate tax rate cut to 25% by 2026-27. All three credit rating agencies, Fitch, Moody’s and S&P Global affirmed Australia’s AAA sovereign rating following the release. S&P Global also had a negative outlook, expressing concern over the budget deficit, household debt and housing prices. Subsequently n 22 May, S&P Global downgraded almost all Australian financial institutions’ credit ratings (23 in total) by one notch, citing vulnerability to high private debt and property prices. The big four Australian banks were spared, due to likely support from the Australian government. On 11 May, the RBNZ’s latest quarterly Monetary Policy Statement , reported annual CPI inflation increased to 2.2% in the March quarter (from 0.4% in the December quarter). However, this was considered transitory and driven by tradeables, whereas non-tradeables inflation remained subdued but had increased since mid-2015. House price inflation had slowed since mid-2016. The Statement provided that the official cash rate was “expected to remain low for a prolonged period” and the RBNZ was “flexible in its approach to inflation targeting, looking through temporary volatility in inflation and setting policy in a way that avoids unnecessary volatility in output, interest rates, and the exchange rate”. The global economic outlook was improved but risks were skewed to the downside. NZ GDP (production) was projected at 3.1% in the 12 months to March 2017, 3.4% for the subsequent two years and 2.4% in 2020. CPI was forecast to fall from 2.2% (actual) in the 12 months to March 2017 to 1.1%, 1.9% and 2.1% in the following years. Unemployment over the same period was 4.9% (actual), 4.6%, 4.4% and 4.6% respectively. The official cash rate was expected to remain at around 1.8 to 2.0% over the period. On 25 May, the NZ Government delivered its 2017-18 federal budget. The Operating Budget Before Gains and Losses (OBEGAL) surplus was projected to progressively rise over the next five years, from NZ$1.6bn in 2017 (0.6% of GDP) to NZ$7.2bn in 2021 (2.2% of GDP), compared with a surplus of NZ$1.8bn in 2016 (0.7% of GDP). Net debt was projected at NZ$62.3bn in 2017 (23.2% of GDP) and to peak at NZ$65.7bn in 2019 (22.1% of GDP) before declining to NZ$62.8bn in 2021 (19.3% of GDP). Key highlights included NZ$32.5bn in infrastructure investment over the next four years and NZ$373m for innovation investment. Real GDP growth was forecast at 3.1%, 3.5% and 3.8% for the next three years (ended June) before declining, while unemployment was forecast at 5% for the next two years and 4.6% in 2019. Inflation was projected at 1.8%, 1.6% and 2.1% over the same period. The NZ Debt Management Office (NZDMO)’s NZGB programme forecast gross issuance to remain at NZ$7bn for 2017-18 but was revised higher for the following three years, by a cumulative NZ$1bn compared to figures last reported in its December 2016 update. According to the FOMC’s 2-3 May meeting
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