July was all about central banks cutting interest rates to support growth. Share markets love low interest rates so this spurred equity markets to new highs in both Australia and the US.
The RBA’s focus is very much on spare capacity in the labour market, where employment growth flat-lined in June and the unemployment rate was steady at 5.2%. Leading indicators still suggest little improvement in unemployment in coming months.
With building approvals and retail sales both weak, and consumer and business confidence down it is not surprising the RBA cut the cash rate to a new record low of 1.0% in July. As noted in the regular RBA Interest Rate section below, the Bank has taken a breather and left rates steady at 1.0% in the August 6th meeting, but further cuts were not ruled out and Governor Lowe said the cash rate will be low for a long time to come. The markets still expect more rate cuts in coming months, potentially taking the cash rate as low as 0.50% by 2020.
While talk of recessions continues, we should note that households in particular stand to benefit from the RBA’s interest rate decisions. Further, the RBA’s actions combined with associated softness of the A$, and Parliament’s passing of the Government’s tax cut package are all positive factors for the economy as we move into 2020. However, while these measures help reduce the odds of imminent recession, more fiscal stimulus and productivity growth is needed.
Markets have been surprised by how quickly the interest rate landscape in Australia has changed in the last few months. However, investors have reacted positively to the RBA’s moves with bond yields falling to new lows and equities reaching new highs. The ASX200 finally surpassed its November 2007 high of 6829 to reach 6845 on 30 July 2019. The chase for yield in the low cash rate environment has been a powerful driver of investor behaviour.
In the USA, the economy is still in pretty good shape, especially the labour market. However, wage growth looks to have peaked and consumer price inflation is still below the Fed’s target. Markets have been expecting the Federal Reserve to cut the cash rate by as much as 0.5% in July and to then follow up with more cuts in coming months. This, plus reasonable early results in the US earnings season, provided good support for the US equity market. The S&P500 closed above 3000 for the first time on 12 July and reached 3026 on 26 July before slipping back to 2980 by the end of the month.
There were two key reasons for the late pull-back in US equities.
– First, the Fed disappointed the markets by delivering only a 0.25% cut and then Chair Powell exacerbated the situation by saying this was an “insurance cut” and not the start of a sustained easing cycle. He then added that this did not rule out more rate cuts. Markets found all this both confusing and disappointing. President Trump used it as an excuse to launch another broadside at Powell.
– The second reason was that hopes for an improvement in US-China trade relations took a hit near the end of the month when President Trump announced further tariff increases on Chinese goods. In reality, the markets had probably been getting too optimistic about both trade and interest rates.
Globally, the ECB also said it is ready to cut rates and provide more Quantitative Easing if inflation does not pick up. Mario Draghi, the head of the ECB, is retiring and will be succeeded by Christine Lagarde, the outgoing Managing Director of the IMF. Draghi has been one of the best central bankers in the world post-GFC and leaves big shoes to fill.
In the UK Boris Jonson has become PM and faces the task of making Brexit a reality. However, all the underlying problems are still there and as difficult to solve as ever. The Government’s wafer-thin majority in Parliament is very vulnerable and an election before a Brexit deal is quite possible. The polls show the Conservatives and Labour are quite close, despite Corbyn’s radical hard-left agenda. A no-deal Brexit would be a major shock to the UK economy. If this were somehow combined with a Corbyn government, things could get dire indeed. Little wonder the markets are starting to punish the Pound Sterling.
All that aside, it is tax time! We found these interesting charts to show what comes in and what it gets spent on. Here’s the site if you’re interesting in finding more: https://www.budget.gov.au/2019-20/content/overview.htm#glance
Whenever I see this see this sort of information I am reminded of Kerry Packer’s response at the Print Media Enquiry in 1991: “Now of course I am minimising my tax and if anybody in this country doesn’t minimise their tax they want their heads read because, as a government, I can tell you you’re not spending it that well that we should be donating extra”.
Other Sources: CommSec, Quilla Consulting, RBA, Bloomberg.