The rally post the US Federal Reserve meeting has continued as the focus remains offshore and now turns to the risk of a partial US Government shutdown. The first hurdle is the passing of the US Budget due on 30 September and the next is the impending issue around US debt where, in the absence of the ceiling being raised, a default becomes a real risk by mid October.
Historically, in periods of uncertainty around budget and/or debt ceiling issues, equity markets weaken and bond yields rally – something we saw last year with the US “fiscal cliff” negotiations. This has been the case for the last week and is expected to continue in the short term.
The market has continued to raise the probability of a rate cut, with the February/March period now the most favoured time, which has been driven by developments offshore rather than locally. As you can see, for this Tuesday’s Reserve Bank of Australia (RBA) Board meeting, the probability of a rate cut is virtually zero.