Australian Investment Blog

Inflation collapses and people mention the "D" word Australia's extremely weak inflation numbers released at 1130am yesterday shook the markets to their core with the $A plummeting from 77.5c to 76c as a rate cut, potentially as soon as next Tuesday, became a very strong possibility. This was the first fall in inflation since 2008 and totally unexpected. Initially equities embraced the possibility of an imminent rate cut sending the ASX200 up ~60 points before the larger concern of deflation hit home and aggressive selling, primarily focused on the banks, took hold reversing the market almost 100 points / -1.8% to close down 33 points. The actual fall was not that concerning especially with the Dow futures pointing to an APPLE led retreat and most of Asia also giving up early gains but if the market does take deflation as a serious threat things could get ugly for equities. If inflation keeps falling banks are likely to struggle to maintain margins and bad debts will rise as unemployment increases - a vicious cycle which makes the economy weaker. The RBA will be very conscious of this and we’re starting to see changing expectations around a cut next week….NAB the latest to change their official forecast from no change in the cash rate to a 0.25% cut next Tuesday. So far the Australian bond market is not as excited about future rate cuts as it was in April of 2015 when 3 year bond yields were trading ~1.6% - see chart 1. Australian 3 year Bonds Daily Chart