The single biggest driver of markets in 2020
Warren Buffett describes interest rates as the ‘gravity’ for stock prices, thus when rates are high, stock prices should be lower; and when rates are low, stock prices should be higher. And with the RBA slashing rates in half last year, less ’gravity’ helped the ASX200 put in a bumper year of +21%.
So... where will rates go this year? To find out, we asked three of Australia’s best fixed interest managers what the RBA’s next move might be and took the opportunity to also get their thoughts on the trajectories of both the Aussie Dollar and US rates.
Interest rates will be the biggest driver of markets in 2020, so we went out to three experts to find out what to expect. The next move from the RBA next year will be?
Well I think it's going to be down, I'm not a big believer that's it's a multiple rate cuts scenario and then down the rabbit hole of QE. I think what we'll find is that we come to February, the RBA is so far away from its statutory mandate, both in terms of getting the inflation rate back to its target band. It's now 45 months currently that they've been below the target band of record, 60 months since they've been actually at the middle part of the target band and over eight years since they actually got the unemployment rate down to NAIRU. So on that sort of framework, they're definitely still in an easing bias.
Next move is likely to be another interest rate cut almost certainly. The incoming data is just too far away from the stated policy objectives and you know the minutes and all of the commentary suggests that they're very close to going again. So we think February pretty early on in the year, first week of February, more RBA rate cuts.
When you think about the Australian economy, we're still in a sluggish growth environment with housing construction coming off, so we think the RBA will cut to 50 basis points, but we don't think we'll need quantitative easing next year.
Where will the Aussie dollar be next year against the U.S. Dollar?
I think it's going to be north of 75 cents. The Australian dollar's been correlating with interest rate spreads and policy uncertainty. I think they're going to re-correlate with commodity prices and there's considerable upside from where we currently stand on that basis.
I'm comfortable that it will be lower as a result of those rate cuts. It looks like Australia will be quite divergent in its interest rate policy versus other central banks. You remember this year that they all tended to move in unison, but the RBA looks like it'll be going alone early in the year whilst others will be on hold.
We think if you think about the relative strength of the U.S. economy versus the Australian economy, we'll find that Australia will lag and as a result, our currency should continue to fall gradually.
And 12 months from now the U.S. 10-year, bond higher or lower?
The policy tools and actions that have occurred through 2019 will probably see the U.S. economy flare up a little bit in a positive way next year. So, we think bond yields are a little bit higher in 2020.
That's going to be higher as well. We're pretty big believers in the reflationary environment. There's considerable scope for both inflation and real growth expectations to lift from here.
Assuming that Trump is reelected, as would probably be our central scenario at this time, it's probably not as low as you would otherwise expect from me. Given that I do think the Federal Reserve will cut again in the latter part of next year, but I would imagine it's somewhere in this 1.80 to 1.60 range. It's very difficult for it to materially sell off given the asymmetry of policy. The Fed has told us they're simply not hiking rates anytime soon.
MORE ON Macro
2 contributors mentioned