SNAPSHOT

  1. RBA keeps cash rate steady
  2. Housing market rebound continues
  3. Priced to Perfection

MARKET MOVEMENTS

Opening Value at

6 November 2019

Closing Value at

3 December 2019

Movement % Change
ASX200 6,697.12 6,712.30 15.18 0.23%
Dow Jones Index 27,492.63 27,502.81 10.18 0.04%
NASDAQ 8,434.68 8,520.64 85.96 1.02%
AUD USD 0.6894 0.6848 -0.0046 -0.67%
Gold (AUD/oz) $2,153.87 $2,157.55 3.68 0.17%
RBA Cash Rate 0.75% 0.75%

THOUGHTS

RBA leaves cash rate steady at last meeting of the year

At its meeting yesterday, the RBA decided to leave the cash rate unchanged at 0.75 per cent. Economists are still predicting a cut in early 2020 with the RBA maintaining its wait and see approach to allow Christmas and New Year spending activity to filter through.

RBA governor Philip Low stated, “Given these effects of lower interest rates and the long and variable lags in the transmission of monetary policy, the board decided to hold the cash rate steady at this meeting while it continues to monitor developments, including in the labour market,”

Unless the RBA sees an improvement in the economy which supports job growth and consumer spending, then it is inevitable rates will continue to come down.

There was no US Federal Reserve interest rate meeting over November, with the next one scheduled for mid-December; however the market is not expecting any cuts at the next meeting, with the broad consensus being for more cuts to happen in 2020.

Housing market rebound should support economic activity

Core Logics latest figures show the biggest lift in dwelling values across Australia since 2003 with Sydney housing values up around 3.1% in November.

There is clear evidence of interest rates aiding the property market with the RBA stating rate cuts have “boosted asset prices, which in time should lead to increased spending, including on residential construction,” In addition, “Lower mortgage rates are also boosting aggregate household disposable income, which, in time, will boost household spending.”

Core Logic said property markets are responding to a string of factors including low-interest rates, the end of uncertainty around tax policies in light of the Coalitions May election victory and low stock on the market creating a sense of urgency amongst buyers. “The synergy of a 75-basis points rate cut from the Reserve Bank, a loosening in loan serviceability policy from APRA and the removal of uncertainty around taxation reform following the federal election are central to this recovery,”

However, the rapid increase in property prices is bringing back housing unaffordability as a more and more important issue, with rising prices also increasing the risk of excessive borrowing and speculation, potentially worsening Australia’s household debt problem.

Despite the rapid housing market recovery, interest rates are likely to remain very low for a long time. The RBA stated that “it was reasonable to expect that an extended period of low-interest rates will be required in Australia to reach full employment and achieve the inflation target”.

Trade Wars

A strong rally over the month of November left markets vulnerable to a sharp pullback, as mentioned last month, all that was needed was a trigger. The recent drop, with the Dow Jones losing 548 points over two days and the ASX 200 dropping 150 points in one day, was brought on by a sudden resurgence in trade war fears combined with disappointing manufacturing data from the United States.

The ISM Manufacturing reading for November came in at 48.1, a drop from Octobers reading of 48.3 and below market expectations of 49.4. A reading below 50 represents a contraction in the industry, with more manufacturers planning to reduce operations than expand them. This is the fourth straight month below the expansion level and highlights that whilst the American consumer so far appears to be unaffected by the ongoing trade war, other areas of the US economy are feeling an impact.

Whilst the ISM reading is concerning for investors and increases the importance of the payroll report released at the end of the week, the main reason behind the recent selloff was surprise announcements of potential tariffs on France, Brazil and Argentina, with Trump also stating that tariffs may be levelled on any number of NATO allies who do not meet the self-imposed defence spending target of 2% of GDP. The reminder of the unpredictability of Trump’s tariffs and negotiating tactics has introduced a risk-off mentality in markets over the last several days, giving back most of the gains from the last month.

December 15 looms as a key pivot point which will likely decide whether global markets finish the year on a positive or negative note. Investors initially believed that a first phase trade deal would be agreed upon before additional tariffs on $156 billion of Chinese goods, mostly targeted at consumer goods, are scheduled to take effect. The recent trade developments along with news that Trump is willing to wait until after next year’s election for the “right deal” from China has thrown this consensus view into disarray and will likely lead to a volatile trading period leading up to Christmas.

 

Author: Troy Jones
Author: Lauren Chan