February 9, 2016

Australian Markets Weekly:The impact of oil complicates the outlook

The impact of oil complicates the outlook.

The impact of oil complicates the outlook

  • Markets and economies impacted simultaneously by oil price falls, Chinese policies and divergences in growth and monetary policy among the major economies, leading to significant volatility and uncertainty
  • Net effect to date has been low inflation and interest rates, stronger US$, weakness in commodity prices and non-US$ currencies and lower unemployment in advanced economies
  • It’s crucial whether the oil price weakness is supply or demand driven. The latter would be reflected in higher global unemployment and would suggest low inflation and bond yields for longer – the former suggests low inflation and bond yield effects are likely to be transitory as there would be a significant positive offset from consumer spending. That’s what NAB’s modelling and the literature suggests.
  • Either way, in the near-term, there remains pressure on the $A, which we see trading in the US$0.66-0.70 region this year.
  • The RBA left cash rates unchanged in February – as expected. The Bank is watching closely whether Australian employment growth continues and also whether the financial markets turbulence of recent times warns of weaker global and Australian demand.

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