Market Recap 17th February

Headlining the news these past few weeks, the Reserve Bank of Australia has maintained the cash rate at 0.75% despite ongoing concern from Coronavirus hindering short term growth.

Last fortnights decision to maintain interest rates at a record low of 0.75 percent is reflective of the slowing economic conditions in Australia which are forecast to continue for the first quarter of 2020. With bushfires finally being contained due to last weeks deluge and having sustained a prolonged drought, there has been a sharp drag on both household consumption and disposable income. As can be seen in graph 5.2 below, consumption growth remained subdued in Q4 of 2019 with projections indicating an increase towards Q4 of 2020. Interestingly, as can be seen in graph 2.6 household disposable income was lifted due to a tax offset in September 2019, however consumption continued to decline.

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While the Reserve Bank’s cash rate decision was primarily due to uncertainty from the (currently subdued) US-China Trade war and closure of globally embedded supply chains due to the Coronavirus, household consumption was a crucial factor.

Keeping in mind there is an implementation lag associated with monetary transmission, the effects of past rate cuts are not yet prevalent in household consumption figures due to multiple Economic headwinds such as Coronavirus concerns reducing growth. Hence the impact of past rate cuts and current monetary policy maintenance will likely only be evident in the medium to long term. It should be noted that the monetary policy decision is consistent with that conducted by overseas central banks with global interest rates expected to remain low for the foreseeable future. Graph 1.23 illustrates the monetary policy decisions of several key central banks as well as future expectations. As can be seen rates are predicted to remain below 2% as far as next year in multiple countries.

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Speaking of interest rates over the past few years the Australian Prudential Regulation Authority (APRA) in conjunction with the Australia Bureau of statistics have been working to enhance Interest Rate transparency for mortgages, personal and small business loans.  Using interest rate data collected from financial institutions the EFS collection with a larger range of interest rates is being published on a monthly basis.

On Friday 7th February speaking to the House of Representatives Standing Committee on Economics, RBA Governor Phillip Lowe displayed an optimistic outlook for economic growth in Australia with expectations around 2.75 percent this year and 3 percent in 2021. The changes also saw a reduction in the previous budget surplus forecasts from $7.1 billion to $5 billion without accounting for bushfire recovery costs. The Governor also noted that the impact of Coronavirus is bigger than that of SARS, however it is too early to determine what the long term economic effect will be.

In contrast Treasure Josh Frydenberg has warned that the economic impact will be significant due to China’s role within Australian markets in particular within the education sector. However what changes will be made to accommodate for the reduction in surplus remains to be seen.

In global news, last fortnight US President Donald Trump was acquitted in the senate impeachment trial with senators voting 53-47. The Democrats required a majority of 67 votes to have been successful in convicting Trump under the second article of impeachment; accusing him of an obstruction of congress. This marks the end of five months of hearings and investigations into Trump’s dealings with Ukraine.

Unironically the ongoing US-China trade war came to a halt last on the 6th of February with the announcement of tariff cuts flying under the radar. The Chinese Ministry of Finance announced that it would cut $75 billion worth of duties on US imports-a move that aims to allow for greater focus on containment of the Coronavirus. The deal is effective as of February 14th reciprocating the US tariff cuts from 15% to7.5%. However with ongoing closures in the provincial state of Hubei and Wuhan paralysing factories, and transportation routes, the true economic impact of this deals remains to be seen.

To financial markets the ASX closed 27 points higher at 7,130.200 on Friday extending the consecutive gains to four days in a row. Despite ongoing concerns over the Coronavirus  looking at the markets you wouldn’t have noticed with the ASX recording a net increase of 1.56%  this week. Friday’s surge was driven by Commonwealth Bank of Australia (CBA) and National Australia Bank (NAB) shares drawing investors in. Meanwhile Telstra declared a -7.6% change in net profit falling due to the NBN rollout.

To international markets, the Dow Jones closed out at 29,398.08 points shedding 25.57 points (0.09%) off the market while recording a weekly increase by 1%. The Nasdaq gained 2.2% while the S&P rose by 1.58%. In what was otherwise a good week fear over the possibility of a further outbreak lead to a sharp decline of the Dow Jones on Thursday. Nevertheless both domestic and foreign markets appear to be following similar trends and it will be interesting to see to what extent this continues into the futures.

On an end note keep an eye out for economic policy decisions that the Chinese government will make over the coming few weeks in an effort to stem the ongoing impact of the Coronavirus.