Welcome to the first Weekly Commentary for 2019.
Given it’s the start of a new year I thought I’d reflect on the movements of several key market indicators over 2018.
While the RBA cash rate remained at a record low of 1.50%, short term interest rates have drifted higher over the year, not on expectations of future rate hikes but more on liquidity / credit squeeze. In fact, the last two weeks has seen markets start to price in another RBA rate cut due to a combination of expected slowing global growth, lingering trade war negotiations and concerns a Chinese slowdown would negatively impact the Australian economy - raising fears of a recession.
In contrast, longer term yields have moved lower, primarily in the second half as investors left the share market and moved into the safety of bonds. This has resulted in a flattening of the yield curve over the year.
The big losers last year were the currency and share market. The AUD fell to a three-year low in December and one of the worst performers among the Group-of-10 currencies, losing almost 10% in value against the US dollar which has benefitted from a widening interest rate differential as well as risk aversion.
Our share market followed similar moves offshore and had some wild swings but also closed down 7% and near their lows for the year.
My personal view is that the RBA should take no action on monetary policy until all these issues are resolved – for better or worse. The RBA should be patient and watch how the economy reacts as these issues unfold. I therefore believe the RBA will leave the official cash rate on hold this year.
This is despite the US continuing to hike interest rates (although not as far as was originally forecast) in addition to the four rate hikes last year.
The standouts that will drive market direction for me in 2019 will be the outcome of the US/China trade discussions (after the current 90-day truce) and the Brexit negotiations both results could impact global economic growth as well as the magnitude of future US interest rate hikes.
Oh, and of course, I need to add to this mix any potential new tweets that Donald Trump conjures up that may add to the market volatility.
Happy New Year.