If you’ve been following along, you may recall the last interest rate cut by the RBA was in March of this year. Now, rates certainly aren’t expected to increase for the next 2-3 years, however last week’s announcement by Governor Lowe may have signalled a potential cut come November 1st or December 3rd.
“RBA hints to further interest rate cuts”
Governor Lowe stated ”As the economy opens up, it is reasonable to expect that further monetary easing would get more traction than was the case earlier.” Now in order for the RBA to reduce interest rates, there are several options they may consider. They could purchase long term 5-10 year bonds, or cut the 3-year bond target rate by 10 basis points. Maybe even may a combination of the two, however at this stage it’s just speculation. On the back of this announcement the Aussie dollar continued its free-fall closing out at 70.75 US cents (a 2.3% decrease compared to the week before).
“Consumer Confidence Climbs”
Perhaps it was the announcement of the federal budget or maybe even the Australia-New Zealand travel bubble opening, regardless the consumer sentiment index saw a massive spike over the past month.
According to a post-Budget consumer confidence survey, Westpac has estimated an impressive recovery in consumer confidence, up 32% in the past 2 months and reaching levels higher than in October 2018. Westpac economists have suggested this has been the most positive response to a Budget in almost a decade. We would certainly hope so; with across-the-board tax cuts and billions of dollars in government expenditure, this record breaking budget needs to have some payoff.
Time to buy a dwelling?
Confidence in the Australian housing market has followed suit. Saving during the pandemic, the slashing of interest rates, and the positive reaction to the Federal Budget have led Australians to believe that now is the ideal time to buy. The national “time to buy a dwelling” index has increased 10.6% in the past month, growing to its highest level since September 2019. This has marked an important recovery in the Australian housing market following its largest crash in decades just earlier this year.
Confident about this confidence?
While all seems optimistic, we may have to reel our expectations back in a bit. Australia has faired well during the pandemic but it’s important to remember we are living in a volatile era. Consumer confidence has been propped up by JobKeeper and JobSeeker and supported by the tax cuts proposed in the recent Budget. As the coronavirus supplement reaches its end in December and the looming threat of a rising unemployment rate grows ever-present, a large hit to confidence may be a realistic possibility.
ASX 200 records 6 month high then drops
To local markets, the ASX 200 closed what was otherwise a solid week at 6177 points, a decrease of 0.54%. Nevertheless it represents the largest weekly gains in 6 months, an increase of 5.4% in one week. The All ordinaries index followed a similar trend recording a 5.5% increase. So where did the main losses occur? A majority of the week’s losses came from the minerals, energy, healthcare and industrial sectors with CSL decreasing by 0.7% and Scentre Group closing 3.5% lower.
The mining sector seemed to be the hardest hit with iron ore prices tumbling. BHP group dropped by 1.5% over worries about supply and Rio Tinto closed the week out 0.9% lower. In addition there are reports of Chinese authorities imposing tighter import restrictions on Australian coal which combined with Japan’s plan to phase out coal-fired power plants by 2030, may spell disaster for Australia’s coal exports.
References
- https://www.theguardian.com/australia-news/2020/oct/15/mps-loose-talk-drives-australias-relationship-with-china-to-very-low-point-former-defence-chief-warns
- https://www.domain.com.au/news/confidence-in-australian-housing-market-booms-westpac-995817/
- https://www.abc.net.au/news/2020-10-16/australian-dollar-asx-wall-street-markets-covid-stimulus/12773650
- https://www.abc.net.au/news/2020-10-15/asx-wall-street-covid-coronavirus-unemployment/12768688
- https://www.rba.gov.au/speeches/2020/sp-gov-2020-10-15.html
- https://www.commsec.com.au/content/dam/EN/ResearchNews/2020Reports/October/ECO_Insights_151020-Another_month_of_encouraging_job_data.pdf
- https://www.commsec.com.au/content/dam/EN/ResearchNews/2020Reports/October/PMReport_161020-shares-fall-Friday.pdf
- https://www.afr.com/policy/economy/economists-doubtful-on-october-but-say-cuts-are-coming-20200929-p560d3