Arguably, this was one of the biggest weeks for economies internationally and domestically this year. Starting with the Australian economy, the change in PM is expected to have a substantial impact on business confidence, at least in the short term, judging from the historical spikes experienced in the two Rudd/Gillard transitions.
Even with potentially favourable short-term expectations on the horizon, RBA Governor Glenn Stevens adopted an ‘upbeat’ assessment of the domestic economy in the medium term. Claiming recent descriptions of the domestic situation was “more negative than facts actually warrent”, Stevens dampened expectations of a rate cut in the near future and also boosted confidence. Further, he mentioned that he was reassured by the weakening of the domestic currency over the past 12 months and the 200 basis point buffer we still retain.
Obviously familiar with the old joke ‘talk is cheap as supply exceeds demand’, Australia’s chief central banker certainly knows to use such statements sparingly, and thus to great effect. His positive words rounded off what was a good week on domestic markets with the All Ords closing at 5193 and the AUD moving back up to USD 0.72, at least for the time being.
However, this was in part also due to the unexpected decision by the US Federal Reserve to leave rates on hold,once again demonstrating that the consensus of ‘market economists’ can mean very little. Fed Chair Janet Yellen (interestingly enough married to Nobel Laureate George Akerlof) expressed concerns about weaker global conditions, namely lower growth, continuing market volatility and the instability in China. While Stevens downplayed this issues as not unexpected in the RBA’s long-term assessment of the global economy.