Don't worry be happy

On Tuesday the 3rd of February 2009 the Reserve Bank of Australia (RBA) lowered the Official Cash Rate (OCR) by 100 basis points or 1% to 3.25%; it’s lowest level since the 1960’s. The RBA’s fundamental objective in easing monetary policy is to assisting the economy to achieve & maintain full employment, expanding of REAL Gross Domestic Product (GDP) & increasing the availability of bank credit.

In the last Blog, “A common interest” is stated,
“With the fall in the RBA OCR we should see bond prices increase but with that yields falling, share prices should increase as investors move to higher risk and better returns away from bonds, and the Australian dollar should fall. That’s what the economic text books will tell you.”

At close of the day on the 3rd of February 2009, the Australian dollar increased almost by half a cent against the US, spiking from US 63.50 cents to US 64.20 cents, but the day before fell to a 2 month low to US62 cents.
The 30 day Bank Bills continued to fall, 90 day are showing signs of matching 30 day, indicating a flattening of GDP/inflation over a 30 to 90 day period. The 180 day is only 0.30 lower to the 30 day indicating a flattening of GDP in the near future, but the 2 year Treasury Bond is at 2.82%, lower than the 180 indicating there is still further to fall in GDP/inflation for the next 2 years.
The Australian Bond market has been affected by the AFG’s policy of the cash deposit guarantee, in the pass months and investors flee the bond market for the security of cash deposits. The AUS$75 billion AFG cap on the stock of commonwealth bonds introduced by the previous AFG will be lifted to at least AUS$120 billion – equivalent to the combined projected deficits till the year 2012.

Bank-accepted Bills----------------------------Treasury Bonds
Date(D/M/Y)-30 day---90 day---180 day-------2 year----5yr------10yr
2/2/9-----------3.53-----3.07-----2.82----------2.52-------3.26-----4.10
3/2/9-----------3.44-----3.18-----2.93----------2.63-------3.39-----4.22
4/2/9-----------3.39-----3.24-----3.03----------2.71-------3.50-----4.31
5/2/9-----------3.36-----3.24-----3.06----------2.82-------3.60-----4.37

The Australian S&P/ASX 200 index increased by 0.32% with a sharp increased in morning trade then followed by a solid fall all afternoon matched to the timing of a RBA OCR decrease. Interest rate sensitive stocks such as banks, infrastructure & property were the beneficiaries, but the biggest mover was the financial sector. With the announcement of the AFG economic stimulus it potential distorted the equity, bond, money & currency market. Below is a graph taken from the AUSTRALIAN FINANCIAL REVIEW illustrating the S&P/ASX200 intraday moment on 3rd of February 2009



Below is a graph taken from the AUSTRALIAN FINANCIAL REVIEW illustrating the S&P/ASX200 weekly movement from the 2nd to the 6th of February.




On the 28th of January 2009 the International Monitory Fund (IMF), released a media statement titled, “Global Economic Slump Challenges Policies”. The 6 page release is a very bleak read on the forecast for the global economy, starting off with the statement,
“World growth is projected to fall to ½ percent in 2009, its lowest rate since World War II. Despite wide-ranging policy actions, financial strains remain acute, pulling down the real economy. A sustained economic recovery will not be possible until the financial sector’s functionality is restored and credit markets are unclogged.”

Trust me don’t worry be happy.