Investment update 26 June 2018

Last week in the markets

Over the past week Australian shares rose 2.2% with small company shares up 0.4%. Shares in developed countries fell 0.9%, mirroring losses in the US. Shares in emerging markets lost 2.3%. The Australian dollar was unchanged at 74.40 US cents. The Australian 10-year bond yield fell to 2.65%, with the US 10-year bond yield also falling to 2.89%. The oil price leapt 5.4% to 68.58 US dollars per barrel.

You can’t judge a book by its cover – but what about an economy?

The US Federal Reserve produces a beige-covered report that summarises current economic conditions. The report, known as the Beige Book, is released to the public about two weeks prior to regular Federal Open Markets Committee (FOMC) meetings – the meeting where the US interest official rate (or ‘monetary policy’) is set.

The Beige Book doesn’t contain hard data. It contains anecdotal evidence collated from reports provided by each Federal Reserve district. The evidence includes interviews with employers, economists and market experts. These interviews cover wages, employment, consumer spending, prices and key issues for local industries. In May, for example, the District of Richmond noted that ‘coal production increased slightly as coal exporting was buoyed by supply disruptions in Australia’.

So why does the US Federal Reserve collect this sort of information? Because anecdotes give an indication of what might be coming down the statistical pipeline - statistics, unlike anecdotes, take time to compile. The Beige Book gives an early indication of turning points or abrupt changes in economic trends acting like a ‘canary in the coal mine’.

Over the past six months the Beige Book reports have recorded some important chapters in the US economic story. In January 2018, five out of the 12 districts reported tight labour markets. These were the districts of Boston, New York, Cleveland, Richmond and Atlanta. By May, similar stories were coming from Philadelphia, Minneapolis and Dallas, along with modest wage growth across the districts.

The lowest level of unemployment in 18 years (3.8%) has brought with it modest wages increases, and price inflation increased to 2%. This is why the FOMC decided to increase US interest rates by 0.25% in mid-June. As noted by the FOMC, long-term inflation expectations are ‘little changed’. However, the Beige Book reported that ‘contacts in some districts’ expect ‘similar employment and wage gains in the coming months’. This paints a picture of further gradual increases in US interest rates with important implications for rest of the world.

The Investments Team at Mine Super monitors the Beige Book along with many other pieces of US economic data. The Beige Book has been produced six times every year since 1970. As a collection, they tell a story of how the US economy came to be where it is today; but more important is the journey ahead and the destination - a little like your retirement outcome with Mine Super. Our enduring purpose remains: helping to deliver an exceptional retirement outcome for our members which achieves peace of mind along the way.

Signing off

Sean Anthonisz | Senior Quantitative Analyst (Asset Allocation)

Past performance isn't necessarily an indicator of future performance.

Data sourced from Bloomberg, Federal Reserve, The Beige BookUniversity of Pennsylvania and Trading Economics.