RBA to cut | BetaShares

RBA to cut

BY David Bassanese | 28 June 2019

Global Markets

The main development last week was the US Federal Reserve’s decision to give the market a “reality check” with regard to how far and how quickly it is likely to cut interest rates this year.  Judging by comments from Fed chair Powell, the US still seems likely to cut interest rates next month – if only because inflation remains stubbornly benign – but a hoped for 0.5% cut seems unlikely. Given the still reasonable underlying strength in the US economy, it seems premature for the market to expect much more. With Friday’s reading on US core annual consumer price inflation holding at only 1.6% in May, the good news for markets is that the Fed can cut rates even without the economy slowing unduly anytime soon.

The other key market focus was, of course, US-China trade tensions.  Although markets spent the week losing hope that a trade “deal” would be unveiled at the weekend G-20 meeting, they were nonetheless delighted that at least a “truce” of sorts was ultimately announced.  Yet all this meant was that the two sides agreed to keep talking and Trump would delay (for now at least) plans to impose a 25% tariff on the remaining $US300 billion in Chinese imports not yet subject to this levy.

With a trade truce in place, markets may take the opportunity this week to refocus on the “goldilocks” nature of the US economy.  Key readings on US manufacturing will likely show the sector slowing further under the weight of trade tensions, though still holding its head above water.  Payrolls on Friday should show a return to healthier jobs growth (market +170k) albeit at a slower pace than last year. Annual growth in average hourly earnings too should remain benign, edging up to 3.2% from 3.1%

Week Ahead

In Australia the highlight this week will be Reserve Bank of Australia’s likely decision to cut interest rates for the second time this year.  Given the strength of RBA commentary about the still unnecessarily high level of unemployment, I’ve long thought the RBA would move again in July and a majority of economists have now come around to this view.

The RBA is not only likely to cut rates, but also clearly retain a bias to ease further, which should provide further cheer to the share market and help drive bond yields even lower.  The Australian market is already one of the best performing globally this year, helped by the view that Australia retains relatively more spare labour market capacity than its peers, and so has greater scope to cut interest rates.

Data wise, retail sales seems likely to remain relatively muted, while building approvals are still likely to remain in a firm downtrend.  All up the data are likely to highlight the ongoing challenges faced by an economy in the throes of an unavoidable correction in housing construction and debt-fuelled consumer spending.

Have a Great Week!





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