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3 Minute Economic Summary: August-September 2019

Article By Adam Camac | | Financial Planning

Article By Adam Camac | | Financial Planning

  • Following on from record gains in July, Australian equities were down over the month of August as commodity prices struggled and the Australian Dollar weakened further. Australian equities did improve over the start of September but have yet to recover to the highs experienced in July.
  • Trade tension between the US and China continued to negatively impact global markets through August furthering global economic uncertainty.
  • In the UK, markets remain volatile due to fear of a no-deal Brexit with the deadline fast approaching.
  • The US Federal Reserve (Fed) lowered the interest rate by 25 basis points for the second time in as many months. The rate decreases are aimed at positioning the US economy as strongly as possible amid uncertainty about future growth. Going forward, slowing global economic growth and the ongoing trade war between the US and China are expected to weigh heavily on the minds of policymakers. President Trump continues to pressure the Fed to decrease rates more significantly to boost the US economy.
  • In Australia, the RBA stated that an extended period of low interest rates would be required to properly assess the impact of rate decreases on employment and inflation and that further rate decreases would occur if needed. The RBA’s cash interest rate remains at 1% but weak inflation levels and the downside risks to the global economy (trade war, Brexit, Hong Kong unrest) are expected to prompt the central bank to lower the rate once again in the coming months, with two rate cuts a possibility.
  • The housing market began to recover over the past couple of months, but this is yet to provide a significant boost to consumption, with the RBA recognising that the impact of rate decreases and tax cuts have so far been muted for consumer sentiment, in part because wage growth remains flat. However business confidence is increasing with low interest rates and new projects being undertaken. This may help employment into the medium-term.
  • Demand for bonds increased greatly over August with the 10-year government bond ending the month at a notable low yield rate of 0.89% as recession fears lingered. Historically high demand for bonds have reflected expectations of interest rates decreasing with weaker than expected domestic data also contributing and investors seeking defensive assets. Over September, globally, bond demand began to fall as investor sentiment slowly improved and more money was shifted back to growth assets.

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