Monthly Investment Report

November 2019

Level 14, 5 Martin Place Sydney, NSW 2000 Website: https://imperium.markets Email: [email protected] Phone: +61 2 9053 2987 ABN: 87 616 579 527

ACN: 616 579 527 AFSL No. 429718 (Authorised Representative) Holder of an Australian Market Licence

Council’s Portfolio & Compliance

Asset Allocation The majority of the portfolio is directed to fixed and floating rate term deposits (69%) followed by liquid FRNs (13%). The remaining portfolio is directed to overnight cash accounts (13%) and the T-CorpIM Long-Term Growth Fund (6%). Should FRN margins become more attractive relative to deposits, Council may consider increasing its allocation to liquid senior floating rate notes (FRNs). This will not only provide potential upside with regards to the portfolio’s investment returns, but also additional liquidity (FRNs are saleable – generally accessible within 2 business days). For the immediate future, any attractive medium-longer dated fixed deposits should be considered in anticipation of further interest rate cuts by the RBA.

Term to Maturity All maturity limits (minimum and maximum) comply with the Investment Policy. The majority of the portfolio is directed to short-term assets (3-12 months) and medium-term (2-5 years) assets, which account for around 21% and 29% of the total investment portfolio respectively. We believe medium-term assets are where the most value is in the current low interest rate environment.

We continue to recommend surplus funds be allocated to new senior FRN issues or fixed rate term deposits, where attractive (refer to respective sections below).

Monthly Investment Report: November 2019 Page 2

Compliant Horizon Invested ($) Invested (%) Min. Limit (%) Max. Limit (%) Available ($) ✓ 0 - 90 days $8,957,695 25.13% 10% 100% $26,689,859 ✓ 91 - 365 days $7,400,000 20.76% 0% 100% $28,247,554 ✓ 1 - 2 years $7,053,109 19.79% 0% 70% $17,900,179 ✓ 2 - 5 years $10,161,406 28.51% 0% 50% $7,662,371 ✓ 5 - 10 years $2,075,343 5.82% 0% 25% $6,836,545 $35,647,554 100.00%

Counterparty As at the end of November, there was a marginal overweight position to AMP (A-) by ~$195k. We have no concerns with this ‘overweight’ position given over $1.7m is held in the 31 day notice account with AMP. Overall, the portfolio is well diversified across the entire credit spectrum, including an allocation to the unrated ADIs.

Compliant Issuer Rating Invested ($) Invested (%) Max. Limit (%) Available ($) ✓ ANZ AA- $1,714,458 4.81% 30% $8,979,808 ✓ CBA AA- $1,004,157 2.82% 30% $9,690,109 ✓ NAB AA- $3,773,415 10.59% 30% $6,920,851 ✓ WBC AA- $3,000,000 8.42% 30% $7,694,266 ✓ Citibank N.A. A+ $500,340 1.40% 20% $6,629,171 ✓ ING Bank A $3,000,000 8.42% 20% $4,129,511 X AMP Bank BBB+ $7,324,378 20.55% 20% -$194,868 ✓ Aus. Military BBB+ $500,000 1.40% 20% $6,629,511 ✓ BoQ BBB+ $4,000,000 11.22% 20% $3,129,511 ✓ BBB+ $503,145 1.41% 20% $6,626,366 ✓ Auswide Bank BBB $1,000,000 2.81% 20% $6,129,511 ✓ ME Bank BBB $651,859 1.83% 20% $6,477,652 ✓ Newcastle PBS BBB $2,757,154 7.73% 20% $4,372,357 ✓ IMB Bank BBB $1,100,000 3.09% 20% $6,029,511 ✓ Bananacoast CU Unrated $1,743,304 4.89% 5% $39,074 ✓ Police CU SA Unrated $500,000 1.40% 5% $1,282,378 ✓ WAW CU Unrated $500,000 1.40% 5% $1,282,378 ✓ NSW TCorp LTG Unrated $2,075,343 5.82% 6% $0 $35,647,554 100.00%

We remain supportive of the regional and unrated ADI sector (and have been even throughout the GFC period). They continue to remain solid, incorporate strong balance sheets, while exhibiting high levels of capital – typically, much higher compared to the higher rated ADIs. Some unrated ADIs have to 25-40% more capital than the domestic major banks, and well above the Basel III requirements. APRA’s Chairman affirmed that the banks had satisfactorily moved towards an ‘unquestionably strong’ capital position and that bank’s stress testing contingency plans were now far better positioned that

Monthly Investment Report: November 2019 Page 3

was previously the case years ago. APRA’s stress test which hypothetically increased the unemployment rate to 11% (more than double the current rate) and for house prices to fall 35% showed the banks remained above the minimum capital levels. We note that APRA’s discussion paper also highlighted that the domestic major banks were required to raise more capital while the lower rated ADIs were already deemed to be at a satisfactory level. APRA’s mandate is to “protect depositors” and provide “financial stability”. Overall, the lower rated ADIs (BBB and unrated) are generally now in a better financial position then they have been historically (see the Capital Ratio figure below). We believe that deposit investments with the lower rated ADIs should be continued going forward, particularly when they offer ‘above market’ specials. Not only would it diversify the investment portfolio and reduce credit risk, it would also improve the portfolio’s overall returns. In the current environment of high regulation and scrutiny, all domestic ADIs continue to carry high levels of capital, particularly amongst the lower (“BBB”) and unrated ADIs. There is minimal (if any) probability of any ADI defaulting on their deposits going forward – this was stress tested during the GFC.

The biggest single risk that depositors face in the current low interest rate environment is not credit risk, but reinvestment risk.

Monthly Investment Report: November 2019 Page 4

Credit Quality The portfolio remains well diversified from a credit ratings perspective. The portfolio is predominately invested amongst the investment grade ADIs (BBB- or higher), with a smaller allocation to unrated ADIs.

On 27th August, AMP Bank was downgraded by ratings agency S&P to BBB+ (negative watch), from A- (negative watch). Their short-term rating was unchanged at A-2. This was a result of AMP Group selling its life insurance arm at a revised deal earlier in the month. S&P believed that the group's profits will be less diversified going forward due to this sale. We have no issues with Council’s exposure to AMP Bank (approx. $7.3m) given they continue to have a robust balance sheet with their level of capital remaining above the minimum regulatory requirement set by APRA.

On 27th November 2019, Australian Military Bank formally received a credit rating of Baa1 (long-term) by rating’s agency Moody’s. This was equivalent to a credit rating of BBB+ by Standard & Poor’s. This also impacted the overweight position of the “BBB” category given the $500k investment.

The “BBB” rated ADIs is now above the policy limits, by around $3.6m. Council can partially reduce this exposure by redeeming $1.7m out of the AMP 31 day notice account. A further $0.5m deposit will mature with AMP Bank (BBB+) in December 2019 – this will need to be redeemed and reinvested elsewhere to rebalance the portfolio.

From a ratings perspective, the “BBB” rated banks now generally dominate the number of ADIs issuing deposits within the investment grade space. We anticipate more investors will naturally allocate a higher proportion of their assets into this sector (on a historical basis), considering the most attractive assets from senior debt securities are generally offered by these ADIs.

For now, until the portfolio is rebalanced, Council is largely limited to investments outside the “BBB” rated sector.

All other ratings categories are within the Policy limits:

Compliant Credit Rating Invested ($) Invested (%) Max. Limit (%) Available ($)

✓ “AA” or Major Bank $9,492,030 26.63% 100.00% $26,155,524 ✓ “A” Category $3,500,340 9.82% 60.00% $17,888,193 X “BBB” Category $17,836,537 50.04% 40.00% -$3,577,515 ✓ Unrated ADIs $2,743,304 7.70% 20.00% $4,386,207 ✓ Unrated Managed Funds $2,075,343 5.82% 5.82% $0 $35,647,554 100.00%

Monthly Investment Report: November 2019 Page 5

Performance

Council’s performance for the month ending 30 November 2019 is summarised as follows:

Performance 1 month 3 months 6 months FYTD 1 year Official Cash Rate 0.06% 0.21% 0.48% 0.38% 1.23% AusBond Bank Bill Index 0.08% 0.25% 0.58% 0.45% 1.58% Council’s T/D Portfolio 0.21% 0.64% 1.35% 1.10% 2.83% Council’s FRN Portfolio 0.17% 0.53% 1.16% 0.93% 2.77% TCorpIM Growth Fund 2.22% 3.74% 8.62% 5.20% 16.94% TCorp Benchmark 2.36% 3.82% 8.78% 5.34% 17.40% Council’s Portfolio^ 0.34% 0.84% 1.92% 1.37% 4.19% Outperformance 0.26% 0.59% 1.33% 0.92% 2.61%

^Total portfolio performance excludes Council's cash account holdings. Overall returns would be lower if cash was included.

The total investment portfolio had another solid month in November, returning +0.34% (actual), outperforming the benchmark AusBond Bank Bill Index return of +0.26% (actual).

The portfolio’s longer-term strong performance continues to be anchored by the deposit portfolio, particularly the handful of deposits still yielding close to 3% p.a. or above. However, the majority of these individual deposits are fast maturing and will inevitably be reinvested at lower prevailing rates.

With deposit margins tightening over the past 3 years, compared to previous years, the FRN portfolio was starting to narrow the gap where performance is concerned compared to the deposit portfolio, although this is likely to reverse following successive interest rate cuts in June, July and October 2019.

The T-CorpIM Growth Fund contributed strongly to outperformance this month, returning +2.22% (net actual) as shares continued their positive momentum since the start of the calendar year. Despite the volatility experienced over the past 2-3 years, it continues to be best performing asset over longer- term timeframes.

Over the past 12 months, the total portfolio (excluding cash) returned +4.19% p.a., outperforming bank bills by 2.61% p.a. Performance over the past 2-3 years has, at times, been subject to the volatility experienced by the managed funds of Macquarie (now redeemed) and TCorp.

Investors using the Imperium Markets platform have reduced the invisible costs associated with brokerage, and thereby lift client portfolio returns as investors are able to deal in deposits directly with the ADIs and execute at the best price possible. Council has experienced this over the past 2 years with the handful of deposits placed through the Imperium platform at up to 5-10bp higher than brokers or email rate sheets.

Monthly Investment Report: November 2019 Page 6

Council’s Term Deposit Portfolio & Recommendation As at the end of November 2019, Council’s deposit portfolio was yielding 2.55% p.a. (down 2bp from the previous month), with an average duration of around 489 days (~1.3 years). It remains relatively well positioned to address the low interest rate environment. Where possible, we recommend Council extends or at least maintains this average duration. In the low interest rate environment, the biggest collective risk that the local government sector has faced over the post-GFC era has been the dramatic fall in interest rates - from 7¼% to the current historical low levels of 0.75% (and potentially lower next year). As the past decade has highlighted (post-GFC), we have seen too many portfolios’ roll a high proportion of their deposits between 3-6 months, resulting in their deposits being reinvested at lower prevailing rates. That is, depositors have generally not insured themselves against the low interest rate environment by diversify their funding across various tenors (out to 5 years) but rather placed all their ‘eggs in one basket’ and kept all their deposits short. Reinvestment risk has collectively been and continues to be the biggest detriment to depositors’ interest income over the post-GFC period. Another interest rate cut remains a possibility by mid-2020. We are pleased to see that Nambucca Shire Council remains amongst the top performing Councils in the state of NSW where deposits are concerned, earning on average, more than $40,000 in additional interest income compared to its peers (as per our September 2019 rankings). We have been pro-active in our advice about protecting interest income and addressing reinvestment risk for many years and encouraged to maintain a long duration position. This is now reflected by the high performance of the investment portfolio. Of the 28 individual deposits Council held, 6 are still yielding higher than 3.00% p.a. That is, around 21% of outstanding deposits held is earning more than 4 times the prevailing cash rate of 0.75%. This will anchor future returns and will help mitigate the rapid fall in interest income from deposits should the RBA continue its easing cycle. At the time of writing (early December), we see value in:

ADI LT Credit Rating Term T/D Rate

Judo Bank BBB 2 years 2.20% p.a.

BoQ BBB+ 5 years 2.00% p.a.

BoQ BBB+ 4 years 1.90% p.a.

Nexus Mutual Unrated ADI 2 years 1.80% p.a.

AMP Bank BBB+ 18 months ^1.80% p.a.

BoQ BBB+ 3 years 1.75% p.a.

Australian Military Bank BBB+ 2 years 1.71% p.a.

Auswide Bank BBB 2-3 years 1.70% p.a.

BoQ BBB+ 2 years 1.60% p.a. ^ AMP T/Ds – these are grossed up rates which includes a 0.20% p.a. rebated commission from Imperium Markets

Monthly Investment Report: November 2019 Page 7

For those investors that have capacity issues with the “BBB” and unrated ADI sector, we see value in:

ADI LT Credit Rating Term T/D Rate

ICBC, Sydney Branch A 4 years ~1.72% p.a.

ICBC, Sydney Branch A 3 years ~1.55% p.a.

ING A 2 years ~1.55% p.a.

The above deposits are suitable for investors looking to provide some income protection and mitigate reinvestment/rollover risk in the low interest rate environment, and particularly with further interest rate cuts imminent on the horizon. For terms under 12 months, we believe the strongest value is currently being offered by a number of lower and unrated ADIs offering above-market specials (dependent on daily funding requirements):

ADI LT Credit Rating Term T/D Rate

AMP Bank BBB+ 6 months ^2.10% p.a.

Judo Bank Unrated ADI 12 months 2.10% p.a.

Judo Bank Unrated ADI 6 months 2.01% p.a.

Judo Bank Unrated ADI 9 months 2.00% p.a.

Bank of Sydney Unrated ADI 6-9 months 1.99% p.a.

AMP Bank BBB+ 9, 12 months ^1.85% p.a.

BNK Bank Unrated ADI 6 months 1.85% p.a.

Australian Military Bank BBB+ 6 months 1.80% p.a.

MyState Bank BBB 4 months 1.80% p.a.

Australian Military Bank BBB+ 12 months 1.75% p.a.

MyState Bank BBB 3 months 1.75% p.a.

BankVIC BBB+ 4-9 months 1.70% p.a. ^ AMP T/Ds – these are grossed up rates which includes a 0.20% p.a. rebated commission from Imperium Markets

Monthly Investment Report: November 2019 Page 8

Amongst the higher rated ADIs (“A” rated or higher), the following deposits remain attractive for terms under 12 months:

ADI LT Credit Rating Term T/D Rate

Macquarie Bank A 3, 4 and 6 months 1.65% p.a.

ING Bank A 6, 9 months 1.60% p.a.

ING Bank A 12 months 1.55% p.a.

Suncorp A+ 6 months 1.55% p.a.

NAB AA- 3 months 1.53% p.a.

NAB AA- 6 months 1.50% p.a.

Monthly Investment Report: November 2019 Page 9

FRN Market Review

Over November, amongst the senior major bank FRNs, physical credit securities were marked around -3bp tighter (at +80bp) at the longer end of the curve (5 years). Those investors that require liquidity with a domestic major bank (highly rated) and can roll down the curve should invest in 5 year terms over 3 year terms (or shorter), given the ability to lock in capital gains as early as two years after being launched. The grossed up return would be closer to around +105-110bp over a 2 year holding period in a relatively stable credit environment.

During the month, Citibank (A+) issued a dual 3 and 5 year benchmark issue at +72bp and +88bp respectively, printing $750m in aggregate across both tranches. Meanwhile, Bank (BBB) issued a 3 year senior ‘sustainable’ FRN issue at +90bp, printing around $100m. We saw both issues as being fair value.

Collectively over the month, the “A” rated cohort was marked around 2-3bp tighter across 3 and 5 year tenors, while the “BBB” rated sector remained relatively flat. There remains little turnover in the secondary market amongst the lower rated ADI sectors.

Overall, credit remains tight on a historical basis, reaching their levels experienced in early 2018. With a further rate cut priced in over the next 6 months, any medium-longer-dated fixed deposits offered above +100bp should be considered. FRNs will continue to play a role in investor’s portfolios mainly on the basis of their liquidity and the ability to roll down the curve and gross up returns over ensuing years (in a relatively stable credit environment).

Senior FRNs (ADIs) 30/11/2019 31/10/2019

“AA” rated – 5yrs +80bp +83bp

“AA” rated – 3yrs +61bp +61bp

“A” rated – 5yrs +90bp +93bp

“A” rated – 3yrs +73bp +75bp

“BBB” rated – 3yrs +90bp +90bp Source: IBS Capital

Monthly Investment Report: November 2019 Page 10

Source: IBS Capital

We now generally recommend switches (‘benchmark’ issues only) into new primary issues, out of the following senior FRNs that are maturing:

➢ On or before 2022 for the “AA” rated ADIs (domestic major banks); ➢ On or before 2020 for the “A” rated ADIs; and ➢ Within 12 months for the “BBB” rated ADIs (consider case by case).

Investors holding onto the above senior FRNs (‘benchmark’ issues only) in their last 1-2 years are now generally holding sub-optimal investments and are not maximising returns by foregoing realised capital gains. In the current low interest rate environment, any boost in overall returns should be locked in when it is advantageous to do so.

Council FRNs – Sale/Switch Recommendations

In early November, Council sold out of the following FRN given it was yielding a low rate of return to maturity:

• $0.50m BoQ (BBB+) FRN maturing 26/10/2020 (ISIN: AU3FN0033023) – trading margin +59bp or capital price of $100.551 (capital gain $2,755).

We recommend Council holds its remaining FRNs at this stage.

Monthly Investment Report: November 2019 Page 11

NSW T-CorpIM Growth Fund

The Growth Fund returned +2.22% (actual) for the month of November, underperforming its internal strategic benchmark return of +2.36%. Both domestic and international equities continued their rally on expectations that a part (initial) resolution to the ongoing US-China trade war was imminent.

We remain cautious on the future performance of the T-Corp Growth Fund given the high volatility associated with a diversified growth fund, which generally allocates a range of 60%-80% in domestic and international shares. We anticipate a higher level of volatility in equity markets, particularly as downside risks to global growth remain, and notwithstanding the ongoing bouts of geopolitics (e.g. Brexit, Hong Kong) and trade wars (US-China). Equities remain expensive given they have reached multi-decade highs (in some cases, all-time highs). If equities retrace, Council may consider placing additional funds in the T-Corp Growth Fund, should valuations normalise on a historical P/E (price to earnings) ratio.

Since inception, the T-Corp Growth Fund has experienced a negative month once every quarter.

Since Inception T-Corp Long Term Fund

Negative Months 123 (~1 in 3 months)

Positive Months 242

Total Months 366 (30.4yrs)

Average Monthly Return +0.68% (actual)

Median Monthly Return +1.02% (actual)

Lowest 1 year Rolling Return -21.12% p.a. (Nov 2008)

Highest 1 year Rolling Return +29.89% p.a. (Jan 1994)

Monthly Investment Report: November 2019 Page 12

Monthly Investment Report: November 2019 Page 13

Economic Commentary

International Market Global equity markets rallied in November as investors were focused on the apparent partial deal aimed at resolving the long-running US-China trade wars. In the US, the S&P 500 Index surpassed its all-time highs, gaining +3.40%, while the NASDAQ rallied +4.50%. The rally was also attributed to the upbeat assessment of the economy from US Federal Reserve Chairman Jerome Powell. Across Europe, the main equity indices also gained strongly over the month, led by France’s CAC (+3.06%), Germany’s DAX (+2.87%) and UK’s FTSE (+1.35%). US headline CPI came in at +0.4% m/m for October, while core CPI came in line with expectations at +0.2% m/m, taking the annual reading to +2.3%. The US trade deficit came in line with expectations, falling to a 5-month low of $52.5bn. The data highlighted the impact of the trade war – in the 9 months to September, US imports from China fell -13.5% while exports fell -14.6%, seeing a narrowing of the US trade deficit to China from $307bn to $266bn. The Bank of England had its first split decision since June 2018 in voting to keep rates unchanged (2 out of 9 voters wanted to cut, citing threats to the outlook and signs of a deteriorating labour market). Germany avoided falling into a technical recession with Q3 GDP coming in at +0.1% as opposed to expected -0.1%. China’s October activity put a dampener in the economic outlook, as the annual growth rate of industrial production reached only +4.7%, down from +5.8%, alongside Fixed Asset Investment of +5.2% y/y, the slowest rate of growth in two decades. The RBNZ kept rates unchanged at 1.00%, against market expectations (80%) of a cut. They have instead supported their motive for monetary stimulus if economic conditions depreciate. The MSCI World ex-Aus Index gained +2.68% for the month of November:

Index 1m 3m 1yr 3yr 5yr 10yr

S&P 500 Index +3.40% +7.33% +13.80% +12.62% +8.72% +11.11%

MSCI World ex-AUS +2.68% +7.27% +12.30% +10.36% +5.83% +7.37%

S&P ASX 200 Accum. Index +3.28% +4.80% +25.98% +12.66% +9.90% +8.50% Source: S&P, MSCI

Monthly Investment Report: November 2019 Page 14

Domestic Market The RBA kept rates unchanged at 0.75% in its meeting in November, as largely anticipated. The Bank retained its easing bias, suggesting, “given global developments and the evidence of the spare capacity in the Australian economy, it is reasonable to expect that an extended period of low interest rates will be required…to reach full employment and achieve the inflation target…the Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed”. The RBA’s revised forecast is for inflation to be close to 2% in 2020, growth to pick up from 2.25% to 3% by 2021 and unemployment to drop from 5.2% to below 5% in 2021. Retail volumes fell by -0.1% in Q3, well below market expectations of +0.2%. Retail volumes have now recorded falls of -0.1% in 3 of the past 4 quarters to be -0.2% lower than a year ago. In comparison, the last time volumes fell on an annual basis was the -0.6% decline seen in the early 1990s recession. The trade surplus rose to $7.2bn in September, against market expectations of a decline to $5.1bn. The value of exports recorded a stronger than expected rise of +3% for the month, reflecting rise of +8% in LNG exports, +6% in rural exports and +26% in the volatile non-monetary gold category. Wages grew by +0.5% in Q3, with annual growth slowing to +2.2%, in line with market expectations. Annual growth in both private and public sector wages, excluding bonuses, slowed in the quarter to 2.2% and 2.5%, respectively. Slow wage growth is in line with the RBA’s downgraded outlook. The unemployment rate edged back up to 5.3% in October (from 5.2%). Employment fell by -19k in October after a +13k rise in September. Employment last recorded a double-digit fall in September 2016 (-19k). The participation rate also fell from 66.1% to 66.0%. Underemployment, another measure of spare capacity, also ticked back up in the month, to 8.5%, from 8.3%. Capital expenditure was little changed in Q3, down -0.2% after a decline of -0.6% in Q2 (market expecting +0.0%). The S&P ASX 200 Accumulation Index (equities) gained +3.28%, to be up over +26% for the calendar year, keeping the benchmark on track to complete its best year since 2009. The Australian dollar fell -2.15% in November, finishing at US67.77 cents (from US69.26 cents the previous month). Credit Market The main global credit indices tightened over November as financial markets continued their ongoing rally. Credit spreads remain very tight on a historical basis (trading around early 2018 levels):

Index November 2019 October 2019

CDX North American 5yr CDS 50bp 55bp iTraxx Europe 5yr CDS 48bp 51bp iTraxx Australia 5yr CDS 56bp 59bp Source: Markit

Monthly Investment Report: November 2019 Page 15

Fixed Interest Review

Benchmark Index Returns

Index November 2019 October 2019

Bloomberg AusBond Bank Bill Index (0+YR) +0.08% +0.08%

Bloomberg AusBond Composite Bond Index (0+YR) +0.82% -0.49%

Bloomberg AusBond Credit FRN Index (0+YR) +0.17% +0.14%

Bloomberg AusBond Credit Index (0+YR) +0.72% -0.24%

Bloomberg AusBond Treasury Index (0+YR) +0.87% -0.66%

Bloomberg AusBond Inflation Gov’t Index (0+YR) +1.64% -0.43% Source: Bloomberg Other Key Rates

Index November 2019 October 2019

RBA Official Cash Rate 0.75% 0.75%

90 Day (3 month) BBSW Rate 0.89% 0.93%

3yr Australian Government Bonds 0.65% 0.81%

10yr Australian Government Bonds 1.04% 1.14%

US Fed Funds Rate 1.50%-1.75% 1.50%-1.75%

10yr US Treasury Bonds 1.78% 1.69% Source: RBA, AFMA, US Department of Treasury

Monthly Investment Report: November 2019 Page 16

90 Day Bill Futures Over November, bill futures fell across the longer-end of the curve following the movement in the bond market. At month-end, the futures market was largely pricing in the next 25bp rate cut by Q2 2020, which would take the official cash rate down to 0.50%.

Source: ASX

Monthly Investment Report: November 2019 Page 17

Fixed Interest Outlook

After cutting rates for a third time this year in late October, the US Fed has signalled it may pause from cutting further, providing a more tempered language in its forward guidance, noting “the Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate” and that bank officials “see the current stance of monetary policy as likely to remain appropriate”. The market is currently factoring around a 50-50 chance of a US Fed cut over the course of 2020. Domestically, the RBA remains on an easing bias and is now targeting ‘full employment’, as oppose to merely ‘reducing’ unemployment. They have repeatedly indicated to expect an “extended period” of low interest rates in order to achieve full employment and progress towards their inflation target. The global key risks for the RBA stem from the impact of ongoing trade and technology disputes, persistently low inflation, political uncertainty (e.g. US, Brexit, Hong Kong) and a broader slowdown in the global economy. In Australia, they are closely monitoring employment, inflation, wage growth, housing and consumption. Governor Lowe also discussed unconventional policies and stated “QE becomes an option” at a cash rate of 0.25%, but he believes it is unlikely that the RBA will need to undertake quantitative easing (QE) in the near future as the economy is still moving towards full employment and the inflation target. The RBA Minutes for November’s meeting highlighted the Board considered cutting rates but decided to stay on hold to assess the impact of recent rate cuts. These comments were interpreted as dovish and reaffirmed the RBA’s clear easing bias. The futures market continues to factor in the possibility of another 25bp rate cut by early-mid 2020, which would take the official cash rate down to 0.50%:

Source: ASX

Monthly Investment Report: November 2019 Page 18

Over the longer-term, the domestic bond market continues to suggest a ‘lower-for-longer’ period of interest rates. Over the month, yields fell up to 16bp at the longer end of the curve, with 10-year government bond yields trading around the 1.0% level again:

Source: AFMA, ASX, RBA

Disclaimer Imperium Markets provides fixed income investment advisory services and a financial market platform through which clients and fixed income product providers may transact with each other. The information in this document is intended solely for your use. The information and recommendations constitute judgements as of the date of this report and take into account the information you provided to Imperium Markets about your investment objectives and investment policy. Imperium Markets monitors the entire fixed income investible universe and recommends the best rate available to us, regardless of whether a product provider uses our market platform. You are responsible for deciding whether our recommendations are appropriate for your particular investment needs, objectives and financial situation and for implementing your decisions. You may use our platform to transact with your chosen product providers. Imperium Markets charges a flat fee for our investment advice. Any commissions received are rebated to clients in full. If you choose a product provider who uses our market platform, the product provider pays us 1bp p.a. of the value of the investments transacted.

Monthly Investment Report: November 2019 Page 19