The Reserve Bank of Australia (RBA) has painted a pretty upbeat picture of the domestic economy even as it held interest rates at a record low for the 18th consecutive meeting today.
This is a "Goldilocks" outcome for equity investors who are having to stomach a significant increase in volatility for the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) because low interest rates are supportive of share prices while the generally positive outlook from our usually conservative central bankers will bolster risk appetite.
A Goldilocks moment is when the economy isn't running too hot where the RBA will be forced to lift interest rates but isn't too cool as well to worry investors about growth.
The RBA's decision to keep interest rates at 1.5% will put a smile on the faces of shareholders in interest rate sensitive stocks like banking giants Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC), as well as infrastructure companies like Transurban Group (ASX: TCL) and Sydney Airport Holdings Pty Ltd (ASX: SYD).
But here are some additional things behind the RBA's thinking that every investor should know about:
- Anaemic wages growth has bottomed. The RBA thinks that the poor wage growth which has been holding back the economy has troughed and is poised to recover as some employers are finding it difficult to find workers. Just don't expect a speedy recovery.
- Trade war and China fears? What trade war and China fears? If the RBA is concerned about the Trump trade war, they aren't showing it. The rising risk of global trade barriers which are hammering stock markets around the world barely got a mention. If anything, the RBA is pretty optimistic about Chinese economic growth.
- Growth is poised to accelerate. I would like to say "buckle in" but that might be overplaying it even though the RBA stressed that the Australian economy is forecast to grow faster in 2018 than the paltry 2.4% it achieved last year. But hey, faster growth is still good news for everyone!
- Rising costs of debt even with record low interest rates. This is an interesting conundrum for the RBA who noted that bond yields have been rising, even in Australia. This is another reason why the RBA may stand pat on interest rates even as economic growth picks up steam. Throw in the risks of a trade war and record high household debt to the mix, and you can understand why the RBA may need to sit on its hands for the rest of 2018, if not beyond!
- Worried about surplus apartments? You wouldn't be alone if you were concerned about the number of apartments that are set to hit the market at a time when the housing market is cooling. The RBA has flagged this risk and it doesn't have an answer to address this potential issue apart from hoping that APRA's credit controls will help avert any disasters.
Overall, the RBA has pointed to a lot more positives about the local economy than negatives. Astute investors might read this as a sign to buy any market dip.
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