Market and Economic Update: Australian stimulus reducing pressure on cutting interest rates
28/01/20
From George Lucas, Raiz CEO
Global activity data improves
In positive recent news, flash Purchasing Managers Indexes (PMIs) for advanced economies in January showed further evidence of global economic stability, but not a strong pick-up in growth.
The PMIs are consistent with indications from several forward-looking global economic indicators over the past couple of months, while more timely leading indicators of global growth suggest that a slight turnaround in global trade is just around the corner.
ECB keeps policy on hold
Turning to the Eurozone, the European Central Bank (ECB) left policy settings unchanged at its policy meeting on Thursday as was widely expected, committing to sticking to its existing tools.
On the same day, the ECB officially launched its strategic review of its inflation goal and tools, with ECB president Christine Lagarde providing little new information about what the review will cover. Even so, I suspect that persistently sluggish Eurozone growth will keep inflation below the ECB’s current target of just under 2 per cent, prompting it to loosen policy later in this year.
Across in the UK, the Withdrawal Agreement Bill, which will take the UK out of the European Union (EU) on 31 January, passed all its stages in parliament and has been given royal assent. After the bill becomes law, the European Parliament must ratify it, which will set the stage for Brexit to occur.
Australia’s unemployment rate nudges lower
In Australia, the jobless rate fell to a nine-month low of 5.1 per cent in December, with the improvement driven by the creation of almost 29,000 part-time jobs across the month.
The fall in the unemployment rate shows monetary and fiscal stimulus are starting to work and is reducing pressure on the Reserve Bank of Australia (RBA) to cut interest rates. However, it will be strength or weakness in the Australian- US dollar cross that will dictate what the RBA does this year.
Elsewhere in the region, Indonesia’s central bank, Bank Indonesia, left interest rates on hold at 5.00 per cent, but kept the door open to further cuts. With the Indonesian economy struggling, inflation low and the rupiah appreciating against the US dollar, further easing is likely over coming months.
Coronavirus rattles global markets
The coronavirus has been dominating global headlines and there was some weakness in global stock markets, reportedly triggered by fears about the spread of the virus in China, especially in the city of Wuhan. There are now cases reported outside of China, including in Australia.
History suggests such events rarely have long-lasting and widespread effects on equities. Indeed, it is worth remembering that since the SARS outbreak, which was first reported in Asia in 2003, there have been many epidemics and pandemics which have made little discernible difference to global financial markets, despite impacting far more people than SARS.
For instance, outbreaks of diseases like avian flu, swine flu, MERS and zika failed to generate the same kind of panic as SARS. This is perhaps in part because of the initial secrecy that surrounded the SARS outbreak.
Even so, the coronavirus outbreak clearly represents a test for global equity markets right now, despite the recent strength in equities making it tempting to think that the rally can’t end.
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