China interrupted reporting season this weak devaluing its currency peg (the midpoint of where the…
In a short week the net result for equity markets was fairly neutral but significantly lower than expected inflation data released last Wednesday sent government bond and currency markets into chaos. The Australian dollar dropped from 77.5c prior to the announcement to a low of 75.5c intraday before recovering slightly. Low inflation may not seem that influential but it is a key driver of domestic monetary policy decisions (and interest rate expectations) which influences market returns. We have now had seven years of massive monetary stimulus (admittedly it’s been offshore) which has failed to push growth or inflation to acceptable levels in developed countries. The question for policy makers is what sort of stimulus do we need to encourage inflation.
The inflation figure for the March 2016 quarter was -0.2% (or 1.3% annually – close to the 17 year low of 1.2% recorded on September 2009 and June 2012). It’s fair to suggest this opens the door for more rate cuts from the RBA and puts further pressure on income investors. Interest rate futures are suggesting its a ~50 / 50 call for a rate cut at the RBA board meeting on Tuesday. This is primarily because theory suggest they will cut (CPI below desired range) but recent history suggests they won’t. In our opinion they probably won’t because this also Budget Day and there is uncertainty around what fiscal stimulus will be announced. But one thing is certain, the probability of future rate cuts is now much higher and if companies get any sniff of prolonged deflation then corporate investment will dry up….again.
The budget will dominate headlines this week and Treasurer Scott Morrison gave an early indication in an interview that “gross and net debt was likely to peak over next 5 or 6 years then start falling. Ultimately the question is what is the peak debt amount and can we maintain the AAA credit rating ? There is no doubt the focus will be on narrowing the fiscal deficit and to “start reducing the debt you’ve got to get the deficit down. To get the deficit down you’ve got to get your spending down”. But cutting spending will not support growth so it will be interesting to see what actions are going to be announced to support this …. let hope for tax free infrastructure bonds!
Bloomberg Survey: Total outstanding federal debt is now more than seven times larger than it was before the 2008 global crisis and net debt is predicted to increase to 18.5% of gross domestic product in 2016-17, according to the median forecast in a Bloomberg survey of economists. The underlying cash deficit is expected to reach A$35 billion ($27 billion) next fiscal year, $1.3 billion more than the government had forecast in its December fiscal update.
Banks are also reporting this week and if the Westpac result is anything to go by bank equity investors are in for a bumpy ride.
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