Market Update - October 2019

The Pulse

  • Some indicators point to a heightened risk of recession in the US, but for now inflation remains slightly above target and wages are still expected to rise.

  • The global downturn in manufacturing is deepening, although the services sector remains a bright spot, supported by consumer spending.

  • UK prime minister Boris Johnson remains hamstrung by the parliament and will continue negotiating the fraught issue of the Irish backstop.

  • The Chinese economy is feeling the pinch from the trade war as authorities continue to free up liquidity and increase spending on infrastructure to support growth.

  • Given the softness in Australian economic growth and inflation, the RBA is increasingly likely to cut rates a further 25 basis points to 0.50% by early 2020.

Global economies

With central banks divided on monetary policy, markets expect rates to continue to move down as global risks intensify. The US and China will re-enter trade negotiations in October, but relations between the two countries have hardly improved since talks broke down in September. Markets are not holding out hope that all issues will be resolved in one round.


The Fed followed through with the largely anticipated easing on 18 September, cutting the Fed funds rate to 1.75–2.00%, the second move in this cycle. According to the so-called ‘dot-plot’, the funds rate is expected to remain at current levels until the end of 2020 before rising to 2.1% in 2021 and 2.4% in the long term.


European data shows growth in the services economy continues to be offset by a slump in the manufacturing sector. The contraction in manufacturing is strongest in Germany, prompting the Bundesbank to warn that the country is likely in a technical recession following negative growth in the June quarter.


The Chinese economy continues to slow. June quarter GDP growth declined to 6.2%, the slowest in 27 years, and there is a risk that it could drop below 6% in the September quarter. Industrial production growth for August was just 4.4%, the weakest in 17 years, while the latest official manufacturing PMI reading was below 50 for the fifth consecutive month.

Asia Region

The Jibun Bank Japan PMIs paint a picture—similar to that of Europe—of service sector growth offset by weakness in manufacturing. Services activity appears to be growing at the fastest pace in two years, while manufacturing activity was the slowest in the past three years.


The Australian economy has not suffered a recession (defined as two consecutive quarters of negative economic growth) for almost 28 years, yet for many conditions will appear stagnant. Australia’s per capita GDP growth rate for the year to June was -0.2% following the slightly negative result in the previous quarter and is the worst outcome since the financial crisis. At its October meeting the RBA voted to lower the cash rate to a new record low of 0.75%, citing the risks to international trade posed by the US-China trade dispute, as well as uncertainty around consumer spending, which has seen only modest increases.