Daily Commentary BY THE CURVE TEAM –

Volatility and Uncertainty Remain the Dominant Themes As We Enter 2019

7th of January, 2019

As we enter a new calendar year, the two key themes that dominated the narrative of 2018, volatility and uncertainty,  remain as prevalent as ever.

While most have been enjoying the holiday season, there has been plenty of water that has flown under the bridge since out last commentary in late 2018. Market’s have been acutely volatility with the traditional low volume period over the holidays resulting in some truly extraordinary moves across a number of markets.

Along with that volatility is the ongoing uncertainty on a number of fronts, both domestically and offshore, which is set to make 2019 a very interesting year.

We have had limited data locally over the break but what we have has hasn’t exactly been positive. House price data for the month of December showed falls are accelerating while the RBA’s credit aggregates confirmed a further softening in the pace of growth in outstanding credit.

The impact of that and a deteriorating outlook globally has seen the outlook for monetary policy continue to shift. Despite the RBA’s continued positive spin on the outlook, market pricing now has a rate cut at a 50/50 proposition by the end of this year with a 2 in 3 chance of a cut priced in by mid 2020.

It sets the scene for a very interesting RBA Board meeting on February 5 and their subsequent quarterly Statement on Monetary Policy due on February 8.

Offshore and the deteriorating global outlook has been driven by further weak data in China. The trade war with the US appears to having an increasing impact on our biggest trading parter which is contributing to a softening in our own outlook. The Chinese desperately need a trade deal or they will be needed to implement new stimulus measures to shore up growth.

It has been an equally interesting period in the US. The data had mostly been softer since the Fed’s December hike which had increased scrutiny of the Fed, their actions and their outlook. It had seen growing calls of a US recession on the horizon and stoked financial market volatility.

It got to the point that the Fed Chairman in an address pointed to the the potential for a pause in the normalisation of monetary policy and even an adjustment in the running down of the balance sheet if required.

Then Friday night we got an absolute bumper non-farm payrolls report with the number of jobs created more than doubled the markets expectations with wages growth rising to is fastest pace since the GFC. So while the Fed Chairman’s recent comments may have soothed markets, the data suggests that the Fed is still on track to tighten policy further over the months ahead.

The Fed set to meet later this month and our own RBA holding their next meeting a week later. We are likely to see increased focus and on the data and heightened volatility ahead of these meetings with a hope of increased clarity once both central bank’s release their latests updates.

David Flanagan

Director - Interest Rate Markets