Here Comes an Interest Rate Cut

Aussie stocks won’t know what to do today. The US market was closed overnight, thanks to the state funeral of former President, George Bush Sr.

As an aside, remember how I told you last week to watch the date — 5 December? US Attorney John Huber was set to testify about his year-long investigation into the Clinton Foundation. But thanks to Bush’s state funeral, it’s now been pushed back. Quite a coincidence, no?

I mention this because the potential revelations could be market moving. The investigation into the Clinton Foundation is likely to be damning. There are A LOT of powerful people involved, not least a former president and presidential nominee.

Aside from a wave of cognitive dissonance that will wash across half the US population who voted for Hillary in 2016, the investigation will likely have far-reaching political and financial implications.

I’ll keep an eye on things for you, as you can be pretty certain that the establishment media won’t report on it accurately.

Getting back to Australia, did you note the market action yesterday?

The ASX 200 sold off heavily, and initially fell below the support level I’ve talked about recently. But buyers came in and the benchmark index closed back above that level, as you can see in the chart below.

The chart shows the ASX 200 on a closing basis, and therefore ignores the intra-day price swings. As you can see, the index has only closed below support (which I have marked at the 5,660 point level) a few times in the past 18 months or so.

S&P/ASX 200 XJO 1 Day Line Chart AUD 6-12-18

Source: Optuma

[Click to open in a new window]

That it continues to hold above this level is about the only thing going for the bulls about now. I’m not suggesting the chart looks bullish, by any stretch. It’s just that until you see a decent break below support (preferably confirmed by similar breaks lower in the important US indices) you can’t get too bearish.

What is there to be bullish about?

Not much. But that’s the point. Market lows arrive in periods of pessimism. Just because you can’t see anything good on the horizon, doesn’t mean the market can’t rally from here.

Having said that, analysing the market is about assessing probabilities, not possibilities. With the market having fallen sharply in the past few months, it is now in a decent downtrend. While a short-term rally is possible, the higher probability is that the downtrend will continue.

Yesterday, you saw the reason for the market’s recent sharp turn south. Economic growth numbers for the September quarter came out and told a story of a fast slowing economy.

The headline growth number came in at just 0.3% for the quarter, down from 0.9% in the prior quarter. Over the past 12 months, the economy grew at an annual pace of 2.8%, down from a healthy 3.4%.

A slowdown in household consumption was the main culprit. It slowed from quarterly growth of 0.7% in June to 0.3% in the September quarter, bringing the 12-month growth rate down to just 2.5%.

The broader measure of the country’s economic growth and wealth creation — real net national disposable income — grew by just 0.1% in the quarter and increased 2.9% over the year.

However, when adjusted for population growth, real net national disposable income per person fell 0.3% in the quarter and grew just 1.3% in the past year.

Obviously, the slide in house prices is having an impact on consumption. Falling equity means you can no longer use the house as an ATM. So it’s hardly surprising that the economy is slowing, given the house price boom is clearly over.

Now, keep in mind that the economic growth data is more than two months old. Maybe the economy has recovered?

Not judging by the stock market. The broader market that I showed you above is only just holding above support. The chart below shows the ASX 200 Consumer Discretionary index. It’s down 20% from the late August peak. The index may be due for a bounce, but it’s in a nasty downtrend. It’s not going to enjoy a sustainable recovery anytime soon.

S&P/ASX 200 Consumer Discretionary 6-12-18

Source: Optuma

[Click to open in a new window]

The Consumer Staples index isn’t looking good either. You can see that each time the index rallied over the past few months, it met with resistance at the 50-day moving average (the blue line). The index is clearly trending lower…

S&P/ASX 200 Consumer Staples 6-12-18

Source: Optuma

[Click to open in a new window]

Also, it’s interesting to note that the formerly high-flying tech index is now turning down too. While it’s not quite the NASDAQ in terms of importance, Aussie tech stocks had a lot of hope and optimism priced in earlier this year. You can see in the chart below there was a ‘blow-off top’ rally into the late August peak.

My guess is that you’ll see prices continue to fall in this sector all the way down to the green dotted line. There is still a lot of optimism and hope to come out of prices.

S&P/ASX 200 Information Technology 6-12-18

Source: Optuma

[Click to open in a new window]

The one bright spot amidst all the gloom is the prospect of interest rate cuts. That could be the thing keeping the market above support right now.

I’ve written previously about the slowdown in broad money supply growth to early 1990s recession levels. Now that the economy has hit a wall, it won’t be long before the RBA starts talking about the potential for rate cuts.

Either the September quarter slowdown is a one off, or it’s fair to say the RBA didn’t see this coming. Governor Philip Lowe decided to keep rates on hold at the RBA’s interest rate meeting earlier this week, and was reasonably sanguine about the health of the economy:

The Australian economy is performing well. The central scenario is for GDP growth to average around 3½ per cent over this year and next, before slowing in 2020 due to slower growth in exports of resources.’

However, he did raise a potential issue over household consumption:

One continuing source of uncertainty is the outlook for household consumption. Growth in household income remains low, debt levels are high and some asset prices have declined.’

The last thing our debt dependent economy needs is an interest rate cut. Low interest rates encourage debt accumulation. It’s why we’re in trouble now! But that won’t stop the RBA from delivering rate cuts if the economy continues to slow.

With no meeting scheduled for January, you could be looking at a February rate cut if things don’t improve. We have a falling stock market, falling housing credit growth and money supply growth, and a sharply slowing economy.

That’s enough to spark any central planner into action! So in the weeks ahead, keep an eye out for growing calls to cut interest rates…


Greg Canavan,
Editor, The Rum Rebellion

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates.

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