Over the past week Australian shares rose 0.8% with small company shares up 0.9%. Shares in developed countries fell 0.2% while the US market was unchanged. Shares in emerging markets fell 1.9%. The Australian dollar was down 2.1% to 74.42 US cents. The Australian 10-year bond yield fell to 2.69%, with US 10-year bond yield also down, closing the week at 2.92%. The oil price fell 1% to 65.06 US dollars per barrel.
On the surface, the Australian and US economies appear to be experiencing similar economic growth: the Australian economy grew 3.1% over the past twelve months while the US economy grew 2.8%, both good results. However, the underlying stories of the two economies are quite different, which is evident in the interest rate policies of each country’s central bank.
In Australia, reported economic growth is strong but there is a feeling of vulnerability around its prospects: a combination of leveraged households, little wage growth, cooling house prices and potentially tighter lending by banks paint a picture of a potential slow down. Meanwhile, US economic prospects appear strong: wage growth is healthy and the government has introduced a generous, potentially unnecessary package of tax cuts.
As a result, in Australia the Reserve Bank recently announced no change in the official cash rate. It has been at 1.5% for 22 months now. In contrast, the US Federal Reserve raised official cash rates for the seventh time in the past three years to a range of 1.75% to 2%.
So, if you ignore the official growth numbers, the two central banks have provided different messages on their domestic economies. In Australia, the Reserve Bank is saying that interest rates need to remain low to support economic growth and underpin households. However, in the US, the Federal Reserve is saying that the US economy is growing strongly, that tax cuts will add to further growth and that it’s appropriate to continue to increase interest rates towards a more normal level.
David Bell | Chief Investment Officer