I’m here with Ian Martin today – Chief Investment Officer of XTB.
I want to cover 3 things today.
- Firstly, employment data
- The RBA and where are they going to go and
- The election – I want to know about bonds and is everything priced in.
Then we’ll finish up with a bit about BBSW and general market conditions.
Employment data, what are your thoughts?
The employment data that came out yesterday was statistically in line with averages that we had seen. However, the RBA had told us that they’re looking for improvements in the employment environment. They did not get that sort of improvement. This would support their easing bias. They told us they want better employment data to come through, otherwise they would cut. The market has therefore moved to assuming and reinforcing effect that it cuts will occur.
NAB suggest June and August rate cuts
We saw NAB come out today as well. They were previously thinking the first rate cut was going to be July and then September. Now they have moved that to June and August. Is that too aggressive for you?
I think that’s a bit aggressive for me. I think there’s a couple of steps. The RBA, historically have shown caution in this type of approach. I think they will come out and as other commentators have made the point – adjust their forecasts – prime the market. I don’t think you get cuts before August. And then, maybe get one or two.
The Election this weekend is that going to play into any of this?
The markets do not like uncertainty. When you have uncertainty, people price in risk. So it will probably help the financial conditions post the election. But, apart from that I think we will continue on the same low that they’ve been on.
Next – Bonds being priced in. I’m getting a few questions from clients basically saying, “Ok, we know that there’s going to be rate cut everyone knows that now. Is everything priced in, or can I still make some money here?”
Certainly bonds have had a very strong year and strong performance. But, what people should remember is there is a bias in the markets for supporting the bond market.
Markets around the world are very focused on trade wars and the risk to growth. They think central banks are looking to move in downward directions. Which is supportive of the bond market – including the Federal Reserve – and here in the RBA. We’re in a very supportive bond market. So, you still get carry – you still get the yield to maturity every day that you own a bond when you buy it.
We’ve been watching BBSW pretty closely. It was up around two – over two – now it’s back quite substantially.
What are your thoughts on that? And how’s that going to play into deposit rates?
The BBSW being the rate at which banks fund themselves in their wholesale market is very important. As you said, it’s come down from two towards one-sixty. That reduces the cost of funds in the wholesale market. When you get that reduction in cost of funds, you often see reductions trailing in deposit rates. I expect deposit rates to continue to come down.