Wednesday 24 July 2019 by Andrew Mayes Opinion

2019 Mid-Year Credit Outlook

One step forward, two steps back. Central banks across the globe fold cards as markets reassess interest rate expectations amid a backdrop of slowing global growth and ongoing trade tensions.


The below is the executive summary from the 2019 Mid-Year Credit Outlook. To read the full article, please click here.

Expectations for monetary policy have swung sharply to easing from tightening in the first half of 2019. Much of this stemmed from a wearying outlook for global growth on the back of heightened trade tensions and ongoing political risk. With the US, Europe and Japan all seemingly poised to respond to the softening outlook, monetary accommodation now appears increasingly in a race to the bottom, from already record (or near record) low levels.

In Australia, on the back of a stubborn level of spare capacity within the labour market undermining wage and inflation growth, the Reserve Bank of Australia (RBA) cut interest rates in June and July, with markets pricing in a further rate cut by year-end. This would mark 2019 as the first time since 2012 has lowered the official cash rate three times or more in a calendar year.

The Australian household sector is particularly soft. Stronger commodity prices and volumes have supported a record trade surplus, supporting the government’s fiscal response (tax relief). Further fiscal measures may still be required. If unemployment and inflation doesn’t respond positively, the RBA appears likely to cut rates again toward the end of 2019 or early 2020.

While the US economy continues to track well on a number of fronts, markets are expecting with near certainty of a rate cut in July, with up to a further two expected toward the end of this year. We would regard any easing in monetary conditions as an attempt to maintain current momentum, rather than a sign that the economy was deteriorating materially. This is despite an inversion in the US government yield curve, which has historically foreshadowed a recession for the last 50 years. 

Bonds and equities have rallied strongly this year, buoyed by the expectation of a fresh round of monetary easing. Given the degree of downside expected by financial markets for the remainder of this year, risks could still surprise on the upside. A resolution in trade tensions between US and China or a resumption of stronger inflation would likely see a sharp repricing of interest rate risk, triggering a significant reversal in the recent bond rally. 

A more nuanced outcome, in our view, is that with the downside already expected by financial markets, periodical reversals should be expected, particularly if inflation surprises. Overall, however, we feel the rally in bonds has further to run this year in the Australia and the US, particularly at the shorter-end of the curve (less than five years). 

This is the executive summary reproduced from the 2019 Mid-Year Credit Outlook. To read the full article, please click here.

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