Likelihood of US rate cut increases as market momentum eases

  • US rate cut seeming more likely
  • Euro zone growth lowest for four years
  • China adopts domestic stimulus measures 

Keep up to date with market insights

Subscribe now

Financial markets stabilised over March as momentum eased slightly because of lingering concerns about the health of the global economy.

In the United States, growth was softer in the manufacturing sector due to a slowdown in the pace of industrial production. Household spending, on the other hand, has remained stable and overall confidence is strong.

The US Federal Reserve has put the handbrake on interest rate increases, which has reduced the risk of a sharp slowdown. In fact, according to market analysts Bloomberg, financial markets are pricing in a reasonable chance of a rate cut by the end of the year.

There appears to be a greater risk to European rather than US growth. In response, the European Central Bank (ECB) recently announced another program to stimulate bank lending in the euro zone, as well as pushing back the timing of any interest rate increases.

The ECB’s decision comes at a time when there are increasing concerns about growth in the euro zone. The economy continued its sluggish pace of growth — the lowest in four years — during the final three months of 2018.

‘The persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets appears to be leaving marks on economic sentiment,’ said ECB president Mario Draghi.

Authorities in China at the National People’s Congress delivered a raft of stimulus measures to support households and businesses through lower taxes, higher credit growth and greater government expenditures. We expect these measures to have a smaller impact globally as initiatives are more geared towards lifting domestic consumption.

At home, the data has been patchy but government spending ahead of the Federal election is likely to lift consumer confidence. The housing market is still trying to find its feet, although bank lending appears to have bottomed out as standards now appear to be slightly more relaxed for borrowers/investors.

Share markets generally finished the month higher but the pace of gains eased. The US led the way as corporate profitability was maintained. The UK market also performed well following a decline in the pound. Emerging markets struggled slightly due to a rise in the US dollar, which magnifies the cost of any borrowings held in US dollars.

Fixed income returns were strong for the month, reflecting the widely held view among central banks that the slowing global economy could point to lower interest rates.

The Australian dollar fell slightly against the US dollar but gained ground on the euro and pound. Unhedged foreign investments enjoyed a lift from the slightly weaker Australian currency.

Fed Reserve meeting Rate cut probability
1 May 2019 8.3%
19 June 2019 27.9%
31 July 2019 35.3%
18 September 2019 57.4%
30 October 2019 61.6%
11 December 2019 72.9%

With the Federal Reserve slowing rate rises, concerns about economic growth in Europe, and China introducing additional domestic stimulus measures, Bloomberg predicts a strong chance of a rate cut by year end.
Source: Bloomberg 29 March 2019

Our performance

View our investment returns

Investment commentary

Our pre-mixed options delivered positive returns over March. Financial markets stabilised with the Federal Reserve leaving rates on hold and China taking steps to stimulate its domestic economy. As a result, we saw funds flowing from less risky assets such as bonds back towards shares.

Australian shares stabilised over the month. Banks have remained under pressure due to lower credit growth, and the retail sector is also struggling as household spending eases.

Global share markets rose during the month at a moderate pace. Corporate profitability in the US remained strong. The UK market also performed well following the pound’s decline. Japanese shares rose modestly as concerns remain over the state of the household sector. Emerging market shares were adversely affected by the stronger US dollar.

Australian fixed interest returned a strong result as local bond yields followed US rates lower in the wake of the Federal Reserve’s brake on rate increases. With household spending, inflation and wage growth all on the low side, we agree with the market that over the second half of 2019, the Reserve Bank is likely to cut the cash rate. The only obstacle appears to be the strength of the labour market.

Past performance is not a reliable indicator of future performance. This information has been prepared by First State Super Investments on behalf of FSS Trustee Corporation ABN 11 118 202 672 AFSL 293340, trustee of the First State Superannuation Scheme ABN 53 226 460 365.