Bets are on for a Melbourne Cup Day rate cut and year-end rally
In this video, Shane Oliver, Chief Economist and Head of Investment Strategy provides an outlook for Australia’s cash rate and sharemarkets moving into year-end.
Is the RBA likely to cut the cash rate?
The September quarter inflation figures in Australia were closely watched because they’re the last major piece of data to be released before the Reserve Bank of Australia (RBA) meets on Melbourne Cup Day, November 3, 2015. The inflation numbers have come in on the low side; the headline inflation rate of +0.5% for the quarter fell short of market expectations of +0.7%. The underlying measures were just +0.3% for the quarter or approximately 2.1-2.2% annualised, which is still at the lower end of RBA’s 2% to 3% target.
The bottom line is that inflationary pressures in Australia are really low and there are many areas of weakness. A lower Australian dollar (it has fallen 20% over the last year) means higher import prices but we haven’t seen a surge in prices flowing through to consumers. In fact, clothing prices are down, car prices are weak, household equipment is fairly soft and of course there are ongoing price declines in areas like electronics and communications. Overall, pricing power in Australia is very soft.
With the banks raising rates and now inflation coming in on the low side, we believe this leaves the door wide open for the RBA to cut interest rates on Melbourne Cup Day.
Outlook for the remainder of the year
October has this reputation of being what some call a ‘bear killer’. In other words, we often see weakness through the September quarter but October often sees a turning point where the market can start going back up again. That’s certainly been the case this time around with good gains in sharemarkets through October after the volatility and weakness we saw in August and September.
There’s a number of factors driving this:
- Markets got massively oversold (they were due for a bit of a bounce) and sentiment became very negative. In this environment, contrarian investors said, ‘well there’s an opportunity here where I can see good value – everyone is bearish – now is the time to buy’.
- The news flow internationally has been more supportive of markets: Chinese economic data has been less negative; monetary conditions in most parts of the world will continue to ease and the US Federal Reserve has indicated that it will be cautious in raising rates so as to not upset global economic recovery.
Looking forward, we know that markets never go in a straight line. We’ve seen a big gain and now, you could say we may be due for a bit of a pause. By the same token, history tells us that we normally see seasonal strength into year-end. The so-called ‘Santa-Clause’ rally may see markets rally into year-end. In an environment of very low interest rates, very easy monetary policy internationally, shares remain reasonably cheap compared to the alternatives.
Going into year-end, we expect a further rally in markets as the cyclical recovery or bull market in shares continues but we could see a short-term pause before this gets underway.
About the author
Head of Investment Strategy and Economics and Chief Economist at AMP Capital, Shane is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.