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Weekly Economic Commentary

Weekly Economic Commentary

Categories: General, Commodities, General

Investor nervousness is on the cusp of turning to panic in global markets at the moment with the New Year hangover continuing for a third week. Those who have tried to catch falling knives are nursing some ugly wounds as commodities and global equities fail to find a bottom.

While equities did manage to stage what some are calling a “dead cat bounce” (Treasury jargon for a small recovery or bounce from a prolonged decline or sell-off) late last week thanks to a 10% jump in the oil price, the market remains nervous. As is the case with this type of analogy (a dead cat doesn’t bounce very high), traders are not entirely convinced that the rally will continue and will want to see the market string together a few positive days of trading before sentiment improves.

Market bets that the Reserve Bank will cut interest rates this year have strengthened in response as global markets shudder at the prospect of a weakening Chinese economy, with economists bringing forward their forecasting of an RBA rate cut as early as June.

The view is that market contagion (slow growth) from China and low energy (oil) costs are expected to weigh on the RBA's thinking which, according to futures pricing, has the chance of a rate cut to 1.75% at the June RBA board meeting now at almost 100%, up from 50% late last year. The odds of a rate cut at the February RBA meeting now sits at 20% compared with 10% last week, while for March, the odds have shifted from 30% to 40%.

Implied pricing of the RBA cash rate from bank bill futures

Source: Rural Bank

 

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