Stock market shrugs off Fed, RBA cut next month on the cards

Markets quickly move on from the Fed

The last 24-hours in financial markets has been about digesting the implications of yesterday morning’s US Fed meeting. Although the Fed, quite literally on-paper, disappointed the market by not flagging the prospect of further interest rate cuts from here – judging by price action, investors have more-or-less reacted to that with a shrug. It’s almost as though markets, rightly or wrongly, aren’t taking the Fed seriously. A crisis of credibility for the Fed? Perhaps so. Ultimately, despite being effectively told otherwise in the Fed’s dot-plots and commentary, the market still sees 3 more rate cuts to come from the Fed in year ahead.

Stock markets rally post-Fed

The fact that the market still sees considerable policy easing coming from the Fed in the next 12 months has kept risk appetite sufficiently supported. Wall Street did close flat overnight, as attention somewhat returned to worrying about the trade-war and global growth. But that was after broad rally in global equity markets, yesterday, with Asian and European equities registering solid gains during their respective sessions. The ASX 200 also put-in a solid day’s trade, as investors jumped back into local stocks as the air cleared after the Fed. The benchmark index also ought to open higher again this morning too, with SPI Futures pointing to a 12-point jump at the open.

The central banking backing-band

Following the Fed, as the support acts if you will, yesterday, were a slew of other central bank meetings. The most significant were the meetings between the Bank of Japan, Bank of England and Swiss National Bank. The key takeaways: the BOJ suggested the Japanese economy is strong, but would step in with aggressive policy in the event of a downturn; the BOE revised down its inflation forecasts, leading to a marginal increase in the odds of a BOE rate-cut this year; the SNB warned that the global economy is slowing down considerably, and pledged to intervene in FX markets if that dynamic leads to an appreciation in the Swiss Franc.

OECD downgrades global growth forecast

Despite what’s been a notionally “risk-on” atmosphere in global markets in the past 24-hours, there persists the view that markets are founded upon deteriorating fundamentals. That bias was somewhat confirmed last night, after the OECD cut its global growth forecast for the year ahead to 2.9%, from 3.2%, citing trade-disputes as a major contributor to this outlook. Now, the reaction to this news was limited. Afterall, the OECD tends to come late to party when it comes to forming a view on markets and the economy. Nevertheless, it’s a stark reminder of the environment investors are operating within presently.

Risk of war in the Middle East still high

Tensions in the Middle East remain uncomfortably high, too. Some of the worries, for now, of an undersupply of oil into global markets have abated. But there is still the material risk, it would seem, of outright military conflict in the region. US President Trump suggested last night that a peaceful resolution in the current stand-off between the US and Iran may not be possible. While Iran’s foreign minister suggested a strike on Iran would necessitate “an all-out war”. Oil prices lifted off the back of these stories, with Brent Crude rallying 1.3% overnight, as markets attempt factor an appropriate “war-premium” into crude’s price.

Australian jobs data disappoints

Australian jobs numbers highlighted the local calendar yesterday. On balance, the data produced a more negative result than expected. Indeed, the economy did add a little over 34,000 jobs last month. However, all of those jobs were part time, with full-time jobs actually contracting by around -15,000 in August. The unemployment also ticked higher to 5.3%, courtesy of a climb in the participation rate to 66.2%. Worse yet, under-employment increased to 8.6%. In short: more Aussies are looking for work, and want to work more, but can’t find anyone to hire them, or give them enough hours.

High chance of an RBA cut next month

The jobs numbers ties strongly into the RBA’s existing logic. “Spare capacity” is rife in the labour market, and it isn’t going to be easy to absorb. If anything, with the way growth is going right now, that problem is going to only get worse. That means a lower chance of hitting full-employment, and boosting wages and inflation to healthy levels. The meaning of the labour market data wasn’t lost on the market yesterday. Markets moves swiftly to price in an 80% chance of a cut from the RBA next month. That’s also pushed the AUD/USD back into the 67-cent handle.