As most market commentators already expected, the RBA left interest rates unchanged at its Melbourne Cup meeting. The ball is now clearly back in the court of the Government and the pressure is mounting for further fiscal measures to help lift the heavy burden. Clearly the consumer is not willing to spend as recent consumer confidence figures have continued to deteriorate despite a strong rebound (some call it a shot term sugar hit) in the residential property market as recent auction clearance rate showing near record highs. In addition, the recent weak profit results by our leading banks further increases the uncertainty for investors with the share prices of our major banks have come off sharply over the past couple of days. Westpac announced on Monday a 16% fall in net profit and a 15% cut in dividends and the bank has announced a $2.5billion capital raising to boost its capital.
However, the more important news over the past week was the third cut by the Federal Reserve in the US. As expected by most market participants, Members of the Federal Reserve Open Market Committee voted to lower rates by 0.25%, to a range of 1.5% to 1.75%. However, what caused some surprise was some comments by Chairman Jerome Powell that the Fed is done cutting rates this year which of course had a swift reaction on Twitter by President Trump calling for lower rates immediately.
During the past months Global bond markets have responded to the massive increase in liquidity by the major Central Bankers and yield curves have slowly normalised somewhat. The US 10-year Treasury Note has bottomed at 1.45% in early September and is currently trading at 1.71% and our Australian 10-year Government bonds have followed moving from a low of 0.87% to currently 1.17%.
Recent comments from the US on a possible deal on the China/US trade war would be an additional reason why bond investors are slowly positioning themselves for a rebound in yields and a more normal yield curve would signal that some growth could return.