Weekly Review: Trade tantrum

Global Markets

Global equities slumped last week reflecting two negative events: disappointment with regard to Fed guidance and Trump’s new tariffs. A flight to safety saw long-term bond yields plumb new lows, the $A weaken, and $US and gold prices firm. The $A has now hit my target level of US 68c, somewhat earlier than expected, while local 10-year bond yields are close to breaking below 1%!

Although the Fed cut rates by 0.25% as widely expected, Fed chair Powell’s declaration that this “was not the beginning of a long series of rate cuts” disappointed the market, although he did add “I didn’t say it’s just one or anything like that”. That’s consistent with my view that the Fed would likely cut rates twice this year but, barring a US recession, the four rates cuts seemingly expected over the next year always seemed unlikely.

Of course, Trump could still make that a reality with this latest decision to impose on 1 September a 10% tariff on the remaining $US300b in Chinese imports not already affected by the trade war. Although the direct effect of these tariffs is still relatively small, the emerging risk is that lingering uncertainty with regard to trade rules causes more global businesses to postpone investment plans, which could lead to a more substantial slowdown in global growth. As it stands, manufacturing in Asia and Europe already appears to be contracting, while in the US it’s only just keeping its head above water.

Against this backdrop, and given little key US data, the degree of weakness in Chinese trade data will likely attract some market attention this Thursday. We’re also reaching the tail-end of the US Q2 earnings reporting season which, although confirming a second quarter of negative annual growth, is at least once again proving better than feared.

Also of note will be the degree of payback weakness in the UK’s Q2 GDP on Friday after pre-cautionary pre-Brexit stock building boosted growth in Q1. A negative GDP outcome is quite possible which, together with mounting Brexit risks, could heighten talk of a UK recession. 

Australian Market

Local economic data was generally soft last week, consistent with the view that the RBA has more work to do. Although the Q2 CPI was a touch higher than expected – reflecting higher petrol prices and some lift in import prices, weak wages and housing costs left annual underlying inflation stuck well below the RBA’s 2 to 3% target band. And although monthly retail sales bounced a little in June, volumes remained very weak in the quarter overall. Home building approvals also continued to slide, though there were more tentative signs that Sydney and Melbourne house prices are finally stabilising after steep declines over the past two years.

Having cut rates in two consecutive months, it’s unlikely that RBA will cut again at this week’s policy meeting. That said, a focus will be whether the Bank revises up its year-end unemployment rate forecast from 5% to a more likely 5.25% when its Statement on Monetary Policy is released on Friday. Housing finance data on Wednesday could show more encouraging signs of a stabilisation in demand – albeit at low levels – while ANZ Job ads today should resume their downtrend after last month’s surprisingly strong bounce.

Have a Great Week!