Daily Commentary BY THE CURVE TEAM –

Wild Ride Continues

30th of October, 2018

The new week saw a continuation of increased volatility with another wild ride for markets. The big questions is will falling assets prices in a number of markets impact the long term outlook.

It was another night of huge volatility with US equity markets moving in a 4% range or over 100 points when it comes to the Dow Jones Index. After initially trying to rally, markets were hit by news that the UK is going after tech companies with new taxes and Trump is threatening more tariffs on China if no progress is made at a meeting later this month.

Markets hate uncertainty and at the moment uncertainty is starting to pile up when the mood is already skittish. Volatility is also seeping into currency markets with the AUD being sold on any rallies. Bond markets on the other hand have been relatively quiet after being singled out as the catalyst for the spike in volatility in the first place.

The big question is whether the fall in asset prices such as equity markets as well as the housing market will have an impact on the long term outlook and the RBA when it comes to monetary policy.

I tackled this question on the Your Money program yesterday. My view at the moment is that we need to keep a close eye on the second round effects of falling asset prices. That means we need to keep an eye on consumer sentiment, which has a history of being impacted by sharp falls in equity markets. We also need to look at retail sales and employment to see if the deterioration in the housing market is impacting the broader economy.

These are the things that the RBA will be keeping a close eye on. They continue to push their base case that solid economy growth and falling unemployment will eventually lift wages and inflation back to the target band. They are likely to remain optimistic unless or until we see second round effect of falling asset prices seeping into the broader economy.

That makes this weeks deluge of data increasingly important. While the data is a little too historical to capture an impact of the October swoon in equity markets, the steady deterioration in the housing market in Australia is likely to have a growing impact on the economy.

Today’s building approval data will be closely watched after last months 9.4% fall. The downtrend in building approvals will be of growing concern given the pull back in demand for construction workers over the past few months.

David Flanagan

Director - Interest Rate Markets