January proved to be an eventful month for the global financial markets. In Australia, speculation about a cut in interest rates intensified through the month, especially after a journalist reported what appeared to be a behind-the-scenes message from the Reserve Bank. Factors contributing to the market expectations of a local rate cut included soft headline inflation in the December quarter, further declines in key commodity prices and interest rate cuts overseas. As things turned out, the Reserve Bank did cut the cash rate to a new record low of 2.25% on 3 February.
Overseas, the data from the US remained generally positive, especially from the labour market although some headline growth indicators showed more moderate readings than in recent months. Europe provided most of the international excitement with the Swiss National Bank abandoning its peg against the Euro, the ECB announcing a bigger than expected programme of quantitative easing and the Greeks electing a radical left-wing government intent on renegotiating its relationship with the rest of Europe. Although the market reaction to the election of the new Greek government has been relatively sanguine so far, there is a real chance of market stress and instability in coming months.
The price will declined further in January and equity market volatility rose again. Bond-sensitive components of the equity market performed well.