Market update

Locally, unemployment and interest rates at low levels

The Australian economy remains on track to grow by over 3% over this year. The labour market is tightening - which means lower unemployment levels - and interest rates remain low, which should support household income and consumption. Government spending on infrastructure is expected to increase and this should also support economic activity.

The cooling housing market and high levels of household debt, however, remain watchpoints.

After a decade of very low and, in some countries, negative interest rates following the global financial crisis, monetary policy is gradually returning to normal. Central banks are slowly raising interest rates and withdrawing liquidity.

This represents a major transition from the low interest rate environment that has prevailed for much of the last ten years and the shift is expected to create more market volatility than we have seen over the past few years.

Fed could pause 'normalisation' 

While the US Federal Reserve has led the trend to normalisation, in light of the market volatility in October and November, the Fed may pause its tighter monetary policy to underpin investor confidence and orderly markets.

The Australian labour market continues to strengthen, with unemployment expected to fall further and wage growth likely to be slow and steady. Inflation is low and should rise only gradually over the next few years. Low interest rates continue to support increased employment. With inflation well-contained, the Reserve Bank left the cash rate unchanged at its early December meeting. 

Inflation pressure emerges

The global expansion continues to soak up spare capacity. This is producing record low unemployment levels in several economies but also  upward pressure on inflation, which is expected to climb higher over the medium term. There is a risk that this could dampen company profit margins. We are watching closely as this could be a headwind for markets.

Another potential headwind for share markets is the recent and abrupt decline in energy prices due to declining demand and increased supply from Russia, Saudi Arabia, and the US. Falling energy prices imply lower profits for energy companies which could be a drag on share markets.

On a more positive note, the recent – admittedly tenuous - de-escalation of trade tensions between the US and China is expected to improve prospects for economic growth, company profitability, and investor risk appetite.

The US mid-term elections saw democrats gain control of Congress, while republicans consolidated their majority in the Senate.

UK Prime Minister Theresa May and European leaders agreed to a Brexit deal, but a number of UK government ministers resigned in protest. The deal has yet to be approved by UK lawmakers. 

Past performance is not a reliable indicator of future performance. This information has been prepared by First State Super Investments on behalf of FSS Trustee Corporation ABN 11 118 202 672 AFSL 293340, trustee of the First State Superannuation Scheme ABN 53 226 460 365.