Is a 4th interest rate cut necessary

By Dale Gillham. Published at Nov 1, 2019, in Market Wrap

The RBA has cut interest rates three times throughout 2019 including June, July and October, and they are due to meet again on Melbourne Cup Day to decide whether a fourth rate cut is necessary to stimulate the economy.

The US just cut interest rates, resulting in the Australian dollar rising against the US dollar, which will play into the RBA’s decision among other factors including the inflation rate and employment figures. The aim is for inflation to sit between 2 and 3 per cent, yet it has currently sat around 1.7 per cent for the twelve months to September 2019. While inflation increased 0.05 per cent in the September quarter, the rise has been very slow over the past few months as the economy is essentially flat.

To stimulate the economy the US needs to finalise a deal with China and while things are very positive on that front, anything can happen. Looking at Asia as a whole, GDP has been growing at a steady rate, which is set to continue in 2020. For many countries the outlook is good, with India topping the list having a predicted GDP growth for 2020 of 7.6 per cent, the Philippians 6.6 per cent, Vietnam 6.5 per cent and China 6.2 per cent, which is only slightly lower than 2019 at 6.3 per cent.

Australia is well positioned to take advantage of the growth throughout Asia, and, therefore, is likely to see GDP growth of between 2 to 3 per cent in the coming year. Given that the RBA will be considering these factors, a rate cut now or anytime between now and Christmas, while possible, is unlikely.

When looking at how the Australian stock market has unfolded in recent months, you would have to think that I am not alone in this assumption given that the market has really only traded sideways, rising just 0.4 per cent in the first four months of this financial year. This indicates that the broader market is more bullish rather than bearish.

Looking at the sectors this week, Information Technology has been the worst performer in October as it is down 3.95 per cent although it is slightly positive this week. Industrials has also only just managed to be in positive territory for the week although it has done well in October ending the month up 2.97 per cent.

The worst sectors were Financials, Consumer Discretionary and Communication Services, which are all currently down for the week over 1.5 per cent. All three of these sectors performed poorly during October with both the Financials and Communication Services ending the month in the red. Healthcare, on the other hand, had a stellar run in October ending the month up 7.58 per cent.

The top performing stocks in the S&P 100 this week are Iluka up over 7 per cent, Blue Scope Steel and Lend lease, which are both up over 3 per cent. At the other end of the scale, GPT was down nearly 6 per cent, while Magellan and ANZ were down over 4 per cent.

So what do we expect in the market?

The All Ordinaries Index has defied logic by holding up rather than falling away into the yearly low, although this week it has started to show signs that it is looking weaker given that it will close lower for only the third time in the past twelve weeks.

Consequently, it now looks like we will see the All Ordinaries trade down to my target level of between 6400 and 6200 points over the coming few weeks with the low likely to occur by the end of the second week of November after which we will see the market turn to rise up into 2020.

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