Interest Rate Decision to Drive Markets this Week

There aren’t many things that can overshadow the limelight of the Melbourne Cup. But the Reserve Bank has a legitimate claim. Tuesday is a potentially crucial day for Aussie markets. While most punters will be glued to the pageantry at Flemington racecourse, traders will have one eye on the RBA.

The central bank meets tomorrow to decide whether to cut interest rates for the third time this year.

Last week’s flat 2.1 core inflation data suggests a rate cut is merited. If nothing else, weak inflation gives the RBA breathing room to lower by 0.25%. It can reduce rates to 1.75% without dramatically inflaming consumer prices. Nor will they have much to worry about in the way of the housing market. The recent big-bank home loan rate hikes have eased pressure on the RBA.

Some, like the Commonwealth Bank [ASX:CBA], have raised mortgage rates directly in line with a potential 0.25% interest rate cut. It suggests that banks are opening the door for the RBA to cut by this amount. And it’s likely that banks will pass these cuts onto borrowers. That would leave borrowers in the same position they were in prior to the hikes.

Yet there’s also enough data to say that they might keep interest rates at bay too.

The non-mining sector is moving in a positive direction. Business and consumer confidence is on the up. These factors could suggest that a rate cut is unnecessary. For now anyway. The RBA might be best holding off should business conditions worsen in the coming months.

Either way, markets aren’t singing from the same song sheet. Less than half of economists surveyed recently believe a rate cut is coming tomorrow. Shane Oliver, AMP Capital chief economist, notes:

We expect the RBA to cut rates by 25 points and that would be taken positively by the market, but it’s not quite a consensus call. There are about 11 economists out of 28 looking for a rate cut’.

Should the RBA lower, one of two things will take place. For one, the Aussie dollar is likely to trend lower this week. The ASX, meanwhile, is likely to rally on the back of any potential cut. On the other hand, steady interest rates will likely dampen the mood on the ASX, and prompt a rally in the dollar.

Aussie dollar climbs higher before interest rate decision

The Australian dollar is trading higher to start the week. On Friday the Aussie was sitting just above US$0.71. As of Monday morning, it’s up 20 cents, fetching US$0.712.

This uptick came despite new reports showing Chinese manufacturing shrank in October. But these were the ‘official’ figures. Markets typically wait for the more credible Caixin data. Luckily, that’s due out today. Caixin data usually reports lower figures than the Chinese government. All of which is to say that manufacturing is worse than official data suggests.

If true, that should weaken the Aussie dollar today. With that said, it’s equally possible that a weaker US dollar keeps the Aussie dollar steady. A weaker greenback has a positive effect on the Aussie, pushing it higher in turn.

Closer to home, Australian manufacturing is down too. The Australian Industry Group (AIG) released data this morning showing a slowdown in October. The so-called PMI fell 1.9 points to 50.2. Anything above 50 indicates growth. Anything below suggests contraction within the industry. At 50.2, manufacturing isn’t contracting, but it is slowing. On a brighter note, exports rose 3.3 points to 55.

AIG explain:

A strong export performance in October helped manufacturing hold onto the gains made by the sector over the previous three months, clocking up the longest expansion in five years.

‘[But] while production lifted again, domestic sales and employment were lower and new orders were broadly unchanged’.

The week ahead on the ASX

The December share price index futures contract was 25 lower this morning at 5,211. The ASX lost 0.5% on Friday, on the back of falls across banking and minerals.

At 10:30am AEST, the ASX was up 9 points to 5,248. The All Ords rose too, up 10 points to 5,298. Energy stocks are trading up, with Santos [ASX:STO] up 3.1%.

It’ll be interesting to see how Westpac’s [ASX:WBC] large profits influence the markets. In early trade, Westpac is down 0.6%. It posted full year cash profits of AU$7.82 billion, up 3% over last year on the back of an increasing loans growth.

Crucially, Westpac business loans rose 6% year on year. That was higher than the growth in personal loans, at 5%. But it was still below a 7% increase in housing loans. On the plus side, investor lending slumped from 11.9% to 9.9% in six months to September. That leaves the bank just under APRA’s 10% lending growth benchmark. However, owner occupier loans were up 18% in the same period.

Either way, the big profits aren’t tempting investors. That might be because, as Westpac admits, the banking sector is in a ‘lower for longer’ environment. In other words, it expects sluggish credit growth, strong competition, and even more regulatory uncertainty going forward. None of which is particularly reassuring from an investor point of view.

Finally, keep an eye on ABS’ release of building approval in September. The Housing Industry Association is set to release its September home sale data report too. CoreLogic RP will round out the real estate reports, with its October home value index due this week as well.

These reports will shed light on the current state of the property market. And they could set the stage for a rate cut…in December. Don’t expect any movement before then.

Mat Spasic,

Contributor, Markets and Money

PS: Whatever happens tomorrow, Markets and Money’s Phillip J. Anderson reckons interest rates will remain at record lows for years. Phil’s written a brand new report, ‘Why Interest Rates Could Stay Low for the 21st Century’. In it, he warns that you won’t be able to rely on your savings to fund your retirement.

Inflation, stemming from low rates, will eat into your savings. Worse still, you won’t be able to count on savings funding your retirement. The regular return on term deposits has halved in the last four years alone.

But you have options, if you choose to act now.

Phil wants to show you the best way to invest in this low interest rate environment. He’s prepared a four-step strategy that could boost your portfolio and wealth. You’ll learn exactly where to park your cash over the coming decades. And you’ll see how this could lead to incredible profits. To download the report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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