January 2019

The Janus Henderson Global Snapshot explores the themes and trends to watch across key global markets.


Profits at risk from slower economic growth and rising wage pressures

Image_The Australian flag
Image_The Chinese flag
Image_The Japanese flag
Image_The USA flag
Image_The European Union flag
Image_A selection of Emerging Markets flags

Market drivers:


Growth eases
While the pace of activity looks to have eased following a strong first half, labour market conditions remained solid with tentative signs of a pick-up in the rate of wages growth.


Profits weakness
Industrial profits fell by 1.8% in the year to November, the first annual contraction since 2015, reflecting limp economic growth and slowing producer prices. Economic weakness intensified at year-end, with manufacturing purchasing managers’ indices falling below 50.


Muted recovery
Industrial output bounced back after third-quarter disruption due to bad weather but underlying momentum appears weak, with the manufacturing purchasing managers’ index well down on a year ago. Consumer confidence has also eroded.


Core stability
Core inflation remained static, defying predictions of a pick-up in response to faster wage growth. The annual increase in the consumption price index excluding food and energy was 1.9% in November, below the Federal Reserve’s 2.0% fourth-quarter forecast.


Weak economy
Purchasing managers’ surveys signalled a further loss of economic momentum in the fourth quarter, following shock German and Italian GDP contractions in the third quarter. The survey-based composite output index fell to a 49-month low in December.

Emerging markets

Policy tightening
The trend towards higher interest rates continued, with inflation and currency concerns outweighing softer economic data. Central banks in Chile, Czech Republic, Indonesia, Korea, Mexico, Philippines, South Africa and Thailand hiked official rates last quarter.

Trends to watch:


RBA to remain on the side-lines
The RBA are likely to remain on hold until they see signs of a sustainable lift in wages. We look for the conditions needed to start a modest and drawn out removal of monetary accommodation to be in place in the first half of 2020.


Policy easing
Policy-makers are cutting taxes, boosting infrastructure spending and trying to encourage bank lending to private companies. Further easing measures are likely in early 2019. Watch money trends – currently still weak – for evidence that policy stimulus is gaining traction.


Inflation slowdown
The Bank of Japan’s core inflation measure eased to 0.3% in November, far below its 2% “price stability target”. Yen strength suggests a further decline. Will the central bank admit defeat and downgrade the target in 2019?


Profits slowdown
Corporate profits continued to expand solidly in the third quarter but equity analysts cut earnings forecasts in late 2018, reflecting concerns about top-line sales and wage costs. A profits slowdown would feed back into business investment and wider economic weakness.


Unemployment reversal
The unemployment rate fell from 8.6% to 8.1% during 2018 but recent weak GDP growth may feed through to a turnaround in early 2019 – contrary to the European Central Bank’s forecast of a further decline to 7.8% by December.

Emerging markets

Currency stabilisation
EM currencies could rally if a US slowdown causes the Federal Reserve to shelve tightening plans. A recovery would ease inflationary pressures and create scope for policy easing, supporting local currency bond markets, with equities suppressed by weaker export earnings.

Source: Janus Henderson Investors as at 31 December 2018. Australian market comments are the views of Frank Uhlenbruch, Investment Strategist, Janus Henderson Australian Fixed Interest Team. Global market comments are the views of Simon Ward, Chief Economist. These views should not be construed as investment advice and may differ from those of other Janus Henderson fund managers.


Yield (%)Yield (%) 
 30/09/201831/12/2018Q4 Total Return (%)
Cash rate1.501.500.38
3yr 'generic' Australian government bond2.051.851.05
10yr 'generic' Australian government bond2.672.323.48
Bloomberg Ausbond Bank Bill Index1.841.980.48
Bloomberg Ausbond Treasury 0+ Yr Index2.422.152.76
Bloomberg Ausbond Credit 0+ Yr Index3.123.041.47
Bloomberg Ausbond Composite 0+ Yr Index2.572.362.24
Bloomberg Ausbond Credit FRN Index2.512.780.44

Source: Bloomberg as at 31 December 2018. Note: Yields on indices reflect the weighted average yields of index constituents. Generic bond returns assume a constant duration.

 30/09/201831/12/2018Q4 Total Return (%)
Trade Weighted Index62.2060.70
Oil - spot brent USD per barrel82.9553.17-35.90
Iron Ore - USD per tonne66.0270.586.91
Gold - USD per troy ounce1,182.871,282.568.43
Bloomberg Commodity Index Total Return (USD)176.31159.72-9.41
S&P/ASX 300 Accumulation Index63,209.8457,896.21-8.41

Source: Bloomberg as at 31 December 2018.

Australian economic view

Frank Uhlenbruch

By Frank Uhlenbruch


Frank Uhlenbruch, Investment Strategist in the Australian Fixed Interest team, provides his Australian economic analysis and market outlook.


Dissecting the fear-to-fact ratio

A case of irrational markets?

It was only mid-November when the US and Australian 10 year government bond yields nudged 3.24% and 2.76%, respectively, and local markets were pricing in no chance of a rate cut from the Reserve Bank of Australia (RBA) and a rate rise in May 2020.

Yet in early January, the Australian 10 year government bond yield rallied down to as low as 2.11%, (only 30 basis points (bps) above the 2016 generational lows of 1.82%) and markets moved to fully price in an easing by August 2020.

Typically, such large moves are driven by a profound negative economic shock which sees risk appetite decline and markets reassess the path of cash rates. Sometimes markets can over-react to a change in state, with negative sentiment feeding on itself and a temporary loss of confidence, or low seasonal market liquidity conditions, compounding moves in asset prices or yields.

So what’s behind the recent rally? Declining fundamentals, poor sentiment, or a mix of both?

There is no doubt that there was a slowing in global and domestic growth over the latter part of 2018, but it appears the market’s adjustment to this was exaggerated by political dramas and a decline in market depth over the Christmas and New Year period.

We see recent volatility leading to offshore central banks delaying any tightening plans, which in turn, will help stabilise sentiment and activity levels. Our view is that the RBA will respond to recent developments by signalling confidence in the domestic outlook and the stabilising role that it can play by leaving the cash rate unchanged at accommodative levels until it sees signs of wages lifting.

Fundamentals point to a delay and watering down of tightening expectations, fully pricing in an easing reflects excessively bearish sentiment that should unwind as economic outcomes are not as dire as expected.


Source: Bloomberg, Janus Henderson Investors. As at 31 December 2018.

This information is issued by Janus Henderson Investors (Australia) Institutional Funds Management Limited (AFSL 444266, ABN 16 165 119 531). The information herein shall not in any way constitute advice or an invitation to invest. It is solely for information purposes and subject to change without notice. This information does not purport to be a comprehensive statement or description of any markets or securities referred to within. Any references to individual securities do not constitute a securities recommendation. Past performance is not indicative of future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

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