Happy New Year and welcome to the first Weekly Commentary for 2017.
The market’s views on the direction of official interest rates shifted sharply towards the end of 2016. Pricing over the past three months has swung from a near certainty of a 25 basis point rate cut in 2017, to a high probability of a rate rise instead (refer chart below).
Cash rate pricing implied by interbank futures
The consensus now is that the RBA will spend this year sitting on the sidelines as it is difficult to imagine another rate cut against a background of resurgent commodity prices, rising US interest rates and uncomfortably high house price growth.
With events over the past week, investors are understandably wary about the new US President who takes office this Friday.
While the inflation story has been wholeheartedly embraced, getting the next step right is important.
I thought I’d start the year with a few of the major questions for 2017, not that I have the answers at this stage… give me time.
- What election promises will Donald Trump be able to actually deliver (refer to the market disappointment after Trump’s press conference in this week’s commentary)?
- Will US interest rate expectations of three rate hikes this year eventuate and what will it mean for the RBA?
- Will the lift in global commodity prices, especially iron ore and oil, run further and add some extra impetus to the Australian economy?
- Will China’s growth slow or improve and will concerns over their exchange rate and the future trade relationship with the US impact their policy?
Markets continue to unwind the Trump post-election moves with some traders naming it the “Trump Slump”. This continues to drive price action at the moment (US dollar weakness, lower yields and weaker equities) and is expected to do so for the short term, however the momentum of moves off the back of Trump’s press conference last Wednesday have slowed in recent days.
Market focus for the next few weeks will be on how Donald Trump settles in to his new job and how he handles upcoming press conferences which will hopefully begin to shed more light on policy preferences for 2017.