Financial Market Conditions

Global financial markets saw some volatility over the past month primarily driven an emerging economic crisis in Turkey and contagion fears associated with emerging economies.

Early in the month, tension between the US and Turkey saw the US impose higher tariffs on Turkish aluminium and steel imports. These actions placed pressure on the already weak Turkish Lira which has now devalued 45% this year. This large devaluation renewed speculation on the strength of other emerging economies and saw a flight of capital to more stable currencies and highly rated bonds.

Over the past month, US economic data was mostly positive and has somewhat vindicated recent rate hikes by the US Federal Reserve. Mid-month, US consumer price index data printed at 2.4%, slightly above the 2.3% market consensus. Late in the month, US consumer confidence rose to an 18-year high and US gross domestic product (GDP) data had the US economy growing 4.2% over the past year.

US GDP Graph

Trade tensions between China and the US simmered over the past month. There is hope that these large punitive tariffs would bring both parties to the negotiation table but this has yet to occur.

Australian financial markets also experienced some volatility over the past month. Mid-month the Australian unemployment rate fell 0.1% to 5.3%, to its lowest level since 2012, but the data wasn’t well received by financial markets as the fall was primarily driven by a decrease in the participation rate. Late in the month Westpac increased its variable mortgage lending rate by 0.14% and due to the nature of the Australian mortgage lending market, the other major banks are expected to follow suit. After this news financial market further reduced the likelihood of a near term rate rise as many commentators feel that the regulatory and capital reform agenda being driven by the bank regulator APRA, will continue to cool the Sydney and Melbourne housing markets.

House Price Index Graph

The Reserve Bank (RBA) met in early September and left the official cash rate unchanged at 1.5%. The statement that accompanied the decision was mostly unchanged from the previous meeting, with Governor Lowe reiterating that the labour market remains positive and that a gradual decline in unemployment is expected over the next couple of years to around 5%. The Governor also noted that moderation in housing prices is being largely driven by reduced demand by investors as the dynamics of the housing market have changed. Current interest rate futures market pricing predicts that the cash rate will be on-hold for at least the next 12 months.

Implied RBA Cash rate as at 31/08/2018:

RBA Rate Graph