Last Interest Rate Cut? End of year wrap up

Here is some important data in relation to the interest rate cycle

  • The Swap rate has risen to 1.84% from 1.53%
  • Ten Year bond rates have risen to 2.38% from 1.82%
  • Oil prices USD 50.00 per barrel ( has stabilised from the massive drops between 2014 and 2015)
  • CPI is 1.7% well below the band of 2-3%
  • Coal prices have bottomed out and heading north ( an improvement to the budget) but not enough
  • The current account deficit is rising at $126.9 billion and to increase by another $34 + billion
  • AAA at risk of downgrade
  • Full time unemployment on the rise

The new Reserve Bank Governor Philliip Lowe in his first speech indicated the impact to use the monetary policy lever to bring inflation to the 2-3% band and the implications for labour market and financial a clear message rates will remain on hold for some time. As a consequence of the above we see the fixed rates moving up.

Unemployment is distorted with the rate at 5.6% having come down from 6.1%. Full time jobs are in decline with 112 thousand lost over the last three months and part time work up. This is another indicator that rates will remain on hold.

We expect the FED to increase rates after the election and perhaps another one in 2017. Central banks in Europe and Japan have been distorting the markets with negative interest rates, this has resulted in negative bond rates in both Germany and Japan.

  • German 10 Year Bond rates have move from -0.19% to 0.18%
  • Japan 10 year Bond rates have moved from -0.29% to -0.05%

The Australian markets have eased on expectations for more interest rate cuts for some time.

Conditions and confidence showed a moderation in conditions overall, but still around the long term average, with services and construction the strongest. Sentiment around confidence rose slightly, probably bolstered by the interest rate cut in August and improving business investment intentions.

House prices in Sydney and Melbourne remain strong Sydney 4.2% and Melbourne 5.8%. Rising house prices we expect will put pressure on house hold debt further risking financial stability.

As this will be our last commentary for the year we hope our insight into the various topics covered has been beneficial. Until our next report in Jan 2017 we like to take this opportunity to wish you a safe and prosperous New Year.

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