5 days that could change your interest rate world

Founder and Publisher of the Switzer Report
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Over the next couple of days, the course of interest rates could be confirmed or changed with Donald Trump catching up with his “friend” Xi Jinping at the G-20 Summit in Osaka, Japan. And what happens will be watched very closely by financial markets, as it will affect share prices, bond yields, forecasts for economic growth around the world and could also influence what the RBA Governor Dr Phil Lowe and his team do with the cash rate next Tuesday.

In turn, that will put pressure on or take it off the banks, which will be expected to pass on the expected 0.25% cut in the official rate controlled by the RBA.

Yep, a cut is the view of the likes of the economics teams at the CBA and Westpac but I bet Dr Phil would love to avoid another cut. However, history shows the RBA has often tried a pair of cuts or increases and then sat back to see if their work has done the trick.

Be aware of this: if Donald surprises us and comes out of the G-20 meeting with the guts of a deal that says the trade war will not escalate, (if it escalated, the US would slam tariffs on another $US300 billion worth of goods) and other tariffs are removed, stocks will surge in the short term. And it not only would inspire spikes in business and consumer confidence worldwide, it would lead to upgrades in economic forecasts and possibly arrest the speculation that we could see a cash rate of 0.5% by 2020!

On the flipside, if Donald and Xi choke on their dumplings and commit to more trade war tariffs, then economic forecasts will drop along with share prices and interest rates.

Investors looking for a reasonable and sustainable income will have to look to dividend-paying stocks, dividend-chasing funds and ETFs, property investments, hybrids and products that tap into the corporate bond market but it means investors are being forced up the yield curve, which means they will be shouldering more risk.

For anyone in this boat, I’d have to recommend they seek out a diversified mix of these yield-paying assets because, even if Donald surprises us with positive news on trade, interest rates will be at low levels for two years as a minimum but could wind up at these disappointing levels for five years or more.

Even if good news on the trade war front excites money markets this weekend, it could take six to 12 months before we see economic rebounds here and around the globe, so central banks might be encouraged to curtail cuts in interest rates but it would be at least two to three years before they would be thinking about raising rates.

If I was forced to bet, I’d wager that Dr Phil will cut next week, even if Donald comes good on a trade deal. But the good doctor will be hoping it might be his last! He’d be hoping the tax cuts, the lower dollar, the rate cuts themselves, on top of the upcoming infrastructure spend and a resurgence of confidence will help our economy surprise its doubters and grow faster in the second-half of 2019 and rolling into 2020.

This is my preferred scenario and it seems very appropriate that I yell: “Go Donald!”

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

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