RBA chief Phil Lowe must be bemused at the reaction to Tuesday’s rate cut with stock prices down 1.4 per cent and minimal news from Canberra in terms of a fiscal response to the slowing economy.
The stockmarket reaction followed the 2.9 per cent fall on Wall Street after the surprise early 50 basis point cut in the US Fed Funds rate.
US stocks rallied initially then fell on the realisation that the Fed thinks the economy is worse than the market expected.
The trading theory says buy the rumour and sell the fact.
This time the reaction was to a rate cut the market had demanded, so by falling on day one financial markets showed little respect to the central banks they clearly control.
AMP fund manager Shane Oliver says of the seven times the Fed has cut between meetings since 1998, the stockmarket has been higher after one month on six occasions and higher one year later just twice.
US Fed boss Jerome Powell spoke for RBA boss Phillip Lowe when he said the Fed can’t do anything about the spread of the disease.
What the banks can do is ease the hit on the economy from the attempts to contain the spread of the disease.
Today’s GDP showing a 0.5 per cent increase in the fourth quarter to bring 2019 growth to 2.2 per cent came in marginally ahead of estimates.
The market is expecting at best zero growth this quarter.
In both Australia and the US the reality is interest rates are so low now any move will have minimal impact on the real economy.
In the US roughly 50 per cent of the market is controlled by indexed funds and electronic traders who are driven by momentum as much if not more than as fundamentals.
Like an NBA game, market results are now confined to action in the last few minutes, which underlines the absence of fundamentals on short term moves.
The bottom line is that the Australian RBA cut interest with zero chance of affecting the real economy and much the same impact on the financial markets it was trying to serve.
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