SNAPSHOT

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

MARKET MOVEMENTS

  Opening Value at

3 October 2019

Closing Value at

5 November 2019

Movement % Change
ASX200 6,742.85 6,697.12 -45.73 -0.68%
Dow Jones Index 26,573.04 27,492.63 919.59 3.46%
NASDAQ 7,908.68 8,434.68 526.00 6.65%
AUD USD 0.6704 0.6894 0.019 2.83%
Gold (AUD/oz) $2,207.26 $2,153.87 -53.39 -2.42%
RBA Cash Rate 0.75% 0.75%

THOUGHTS

RBA keeps cash rate steady

The Reserve Bank board has decided to hold the cash rate at 0.75 per cent, following last month’s rate cut and back-to-back cuts in June and July.

In its statement on Tuesday, the RBA noted the outlook for the Australian economy is little changed from three months ago.

“The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector should all support growth,”

The recent rebound in the housing market has reduced the further need for stimulus and at this stage, it is likely the RBA will take a wait and see approach with analysts predicting rates will remain at this level until February next year.

The US Federal Reserve cut interest rates for the third time this year in October but indicated that this may be the end of its “mid-cycle adjustment”. This cut was on the back of slowing US economic growth and low inflation balanced against a strong US labour market and positive developments in the US-China Trade War. In his address, Fed Chairman Jerome Powell iterated that it would take a “material reassessment” of its outlook for the Fed to consider cutting rates again.

 

Housing market rebound continues

While low-interest rates are good news for homeowners, the recent interest rate cuts along with reduced supply of properties for sale have had a significant impact on the property price rebounds in Sydney and Melbourne.

APRA’s improved lending criteria have also boosted borrowing capacities, improved affordability and post-election confidence have also increased demand for property.

According to Tim Lawless, head of research at CoreLogic, “a rebound in housing values and a rise in buyer activity will hopefully begin to flow through to a gradual improvement in household wealth and spending.”

The question is, how long will low rates last? The RBA Governor Dr Philip Lowe has said the board was prepared to ease monetary policy further if needed and has effectively ruled out negative interest rates.

He also indicated that cheap credit is here to stay “It is likely though that we will require an extended period of low-interest rates to reach full employment and for inflation to be consistent with the target.”

 

Priced to Perfection

On October 11 President Trump announced that the United States and China were working towards a “phase one” trade agreement which will begin the process of calming the trade war that has been a cloud over the global economy for the last 16 months.

Whilst the details of this initial agreement have yet to be finalised, it is believed that it will involve the US ceasing the implementation of some tariffs and removal of others in exchange for China agreeing to purchase up to $50 billion of US farm goods, with phase two and three of the trade agreement expected to tackle the trickier issues between the two countries, such as China’s state subsidies and technology transfer issues.

These positive trade developments, combined with a number of other pieces of positive economic news, including the recent US Federal Reserve rate cuts, better than expected corporate earnings, a strong US jobs reports and solid wages growth in the US have helped investors look past the recent downturn in global manufacturing and produced a “risk-on” mentality. This mentality has helped push US markets to all-time highs, continuing the longest-tenured bull run, as investors look past the recent recession risk and envision a continued growth trajectory, further supported by the promise of continued unconventional economic policy from the European Central Bank and a reduced chance of a Hard Brexit.

However, with markets priced to perfection, the downside risk is increasing, with any setback in trade negotiations or a deterioration in underlying fundamentals in the US economy likely to result in a sharp pullback, highlighting the importance of ensuring you have invested appropriately for your risk appetite.

 

Author: Troy Jones
Author: Lauren Chan