RBA acts for the first time in 33 months – cuts rates

James Gerrish

Market Matters

A choppy session for the ASX today as traders positioned ahead of the RBA rates decision at 2.30pm this afternoon, with Philip Lowe & the board ending the longest streak of inactivity in history, lowering the Australian cash rate by 0.25% to 1.25%. The RBA had sat on their hands for 33 straight months, however a combination of weak inflation and slack in the labour market prompted today's move. After the announcement, the AUD actually rallied while stocks also edged higher, however the fairly muted reactions implied that most, if not all of the move was already baked in.

On inflation, the board said…

The recent inflation outcomes have been lower than expected and suggest subdued inflationary pressures across much of the economy. Inflation is still however anticipated to pick up, and will be boosted in the June quarter by increases in petrol prices. The central scenario remains for underlying inflation to be 1¾ per cent this year, 2 per cent in 2020 and a little higher after that.”

On the labour market the board said …

The Board will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.”
The strong employment growth over the past year or so has led to a pick-up in wages growth in the private sector, although overall wages growth remains low. A further gradual lift in wages growth is expected and this would be a welcome development. Taken together, these labour market outcomes suggest that the Australian economy can sustain a lower rate of unemployment.

In short, they cut rates. However, they were probably more upbeat about inflationary expectations & the employment situation than they could have been. While the bulk of the market was expecting the RBA to cut rates today, and they delivered, the focus will now turn to a potential cut in August. ANZ have passed on 0.17% of the cut, while CBA has passed it on in full.

AUD Chart

Overall today, the ASX 200 added +12 points or +0.19% to 6332. Dow Futures are trading up +15pts /+0.06%.

ASX 200 Chart

ASX 200 Chart


Baby formula stocks: The listed companies selling baby formula into China have been cleaned up today after the country announced targets to become 60% self-sufficient in the market in what signals a turning point in what has been a lucrative strategy for the ASX listed cohort.

The message has come from China’s National Development and Reform Commission which recently pinpointed baby formula as an important product and is developing strategies to help local producers, as well as refocus the customer on China made products. A2 Milk (A2M), Bellamy’s (BAL), bubs Australia (BUB) and Wattle Health (WHA) have all been under pressure since the report was released.

A2 Milk (A2M) Chart

Coca-Cola Amatil (CCL) +2.45%; Australia’s licensee of Coca-Cola products has today ended its tumultuous ownership of the iconic Australian fruit and veg company SPC, selling it to a partnership between fund manager Perma & family office/Private equity name The Eights. The deal was done for $40m, a long way from the Coca-Cola Amatil’s $490m purchase price. CCL has also tipped another ~$200m into SPC since picking it up back in 2005, but has slowly been forced to write-down the asset to near nothing over the years. So much has been written off SPC that Coca-Cola will book a profit in the deal despite paying more than 10 times the price they are set to receive.

CCL has some headwinds as people look for healthier options, although the company has done a good job of diversifying away from the sugary drinks market and as a result seen sales rise accordingly. The company has done well to extract any value out of the sale, and may now see some benefits in the share price as a result.

Coca-Cola (CCL) Chart

Broker moves:

· Carsales.com Downgraded to Neutral at UBS; PT A$14

· Metcash Upgraded to Hold at Deutsche Bank; PT Set to A$2.80

· Newcrest Downgraded to Sell at Morningstar

· Perpetual Upgraded to Hold at Morningstar

· G8 Education Upgraded to Buy at Morningstar

· Reliance Worldwide Upgraded to Buy at Morningstar

· Macquarie Group Upgraded to Buy at Morningstar

· Santos Upgraded to Buy at Morningstar

· Abacus Property Rated New Outperform at Credit Suisse; PT A$4

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James Gerrish
Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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