Daily Commentary BY THE CURVE TEAM –

Markets Quiet Ahead of Fed As Local Property Headwinds Intensify

25th of September, 2018

It was a quiet start to the week as market wait in earnest for FOMC meeting later this week. Locally Westpac has caused another stir for the housing market, this time in a letter sent out to investors.

Most major markets were fairly quiet to start the week in anticipation of the FOMC meeting later this week. Oil caught a bid as the Saudi’s and Russians showed little signs of support for Trumps calls to increase supply. Long term interest rates were a touch higher after a lukewarm 2 year Treasury auction in the US.

Interest rate markets will need to be watched closely given the price action in recent days. While the FOMC is widely expected to hike this week, what they say could set off the next move for long term rates.

The US 10 year yield is on the verge of breaking out higher and will take with it long term rates in a number of other countries should the Fed be more hawkish in their post meeting conference and dot plot update.

Equally, if the language is not a strong, we could see a partial reversal of the recent run up in longer yields before the uptrend resumes.

Meanwhile the headwinds pushing against the Australian property market continue to pick up. After being the first major to hike rates, Westpac is now looking to pull back from investor lending and not just new lending.

The AFR reported yesterday that a one page letter has been sent to exiting investors stating that can “no longer support our commercial relationship with you.” It has offered to help exisiting borrowers find a new lender but that could be easier said that done given the tightening of lending standards already locking borrowers in.

At the moment, the property market slowdown is in the first phase as tightening lending standards and falling demand from investors shifts the demand and supply balance, pushing prices lower.

As long as this phase remains orderly and employment growth remains strong, then a long slow melt of falling prices shouldn’t have a profound effect on consumption and the broader economy.

The risk is that the initial phase morphs into a negative feedback loop. This could happen if the convergence of initial headwinds push prices down far enough where the fall in prices begets a further fall in prices and the negative feedback loop then continue to repeat.

In this situation, lower prices hit consumption and construction when then results in a slowdown in employment growth.

We aren’t there yet but as the headwinds grow, it becomes a growing risk to the outlook and something the RBA publicly is yet to acknowledge even if they are aware of it.

David Flanagan

Director - Interest Rate Markets