Monthly economic update with MLC, October 2019

Funds Management

by Clive Tompkins

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MLC Senior Economist Bob Cunneen speaks to MLC Portfolio Specialist Sinead Rafferty about strong performance in global share markets, cuts to interest rates here and in the US and a weaker local outlook dragged down by consumer spending.

Sinead Rafferty: Welcome to this month's economic update. I'm Sinead Rafferty, Portfolio Specialist at MLC, and I'm joined by our Senior Economist, Bob Cunneen. Welcome, Bob.

Bob Cunneen: Thanks, Sinead.

Sinead Rafferty: Bob, it was another strong month for global share markets in October. What were the reasons behind this?

Bob Cunneen: Well, global share markets were up about 2% for October and there were two key positive factors involved. Firstly, the trade truce between America and China, we saw President Trump announce a phase one agreement, and essentially what that means is that the US and China would restrain from increasing tariffs. And China made some concession to buying more American goods, such as soybeans and the like. So that was a positive factor.

Sinead Rafferty: Not yet booked in though?

Bob Cunneen: Not yet. So essentially, we've got these indications of an agreement, but until both parties sign the bottom line and President Trump restrains himself on Twitter, we don't have a formal agreement as such. So it's a positive factor, but not a decisive factor, if I could put it that way.

The second aspect was the Federal Reserve lowered interest rates. So the American central bank has cut interest rates by now 0.75% this year. And that has particularly made Wall Street quite positive, new record highs for the Standard & Poor's 500, based on the view that interest rates are low and Wall Street's the best place to be.

Sinead Rafferty: Now, we saw rate cuts both in Australia and in the US by 25 basis points. Have those central banks indicated where to from here?

Bob Cunneen: Well, the Federal Reserve has been a little bit more cautious about its forward guidance and suggested maybe interest rates will be on hold. In the case of the Reserve Bank here, they've indicated that they're willing to cut interest rates further. So even though our rates are at now 0.75%, they would consider cutting it even further towards 0.5%.

Now what they've indicated is that the economy remains soft, and we can see that in the business and consumer surveys. We can see it actually in retail spending, which remains weak. Against that, we're seeing some signs of an improvement in house prices. So whether the Reserve Bank actually comes through with another rate cut is still quite debatable.

Sinead Rafferty: What about global government bond deals? We saw those move higher in October. Is that a reflection on improvement in prospects for the global economy?

Bob Cunneen: Yes it is, in terms of those two positive factors. So a trade truce as well as the Federal Reserve cutting interest rates signals that maybe it's putting a base below global growth and from here things should improve. But we need to be conscious one, that trade truce could break, and secondly central banks could be still inclined to cut interest rates again. And that's particularly the case in Europe and Japan.

Bob Cunneen: Against that is the fact that the global bond market might be telling us that more fiscal stimulus is in the wind. That maybe monetary policy is at its limits. There's nothing to gain from cutting interest rates any further in terms of improving growth and raising inflation, and maybe governments need to spend more and cut taxes to generate that sort of growth.

Sinead Rafferty: So how did the Australian share market perform in recent weeks then?

Bob Cunneen: Well, the Australian share market was surprisingly weak, so it went back about North 0.4% for October, and it was a couple of specific factors in play. Firstly, Consumer Staples disappointed. So because retail spending is so soft, some of these share prices were weak, they were down about 2%. We also saw Financials disappoint. Now that's because the Reserve Bank cutting interest rates is a bit of a squeeze on bank profit margins, and with that lower returns from bank shares.

Sinead Rafferty: Thanks for your time, Bob.

Bob Cunneen: Thank you very much, Sinead.

Sinead Rafferty: And thank you for joining us.