Key insights from the week that was.
The week before the Osaka G20 proved to be very quiet, with a sparse calendar and as markets largely marked time.
For Australia, there was no data of significance, and comments by the RBA were kept broad. Appearing on a panel at an ANU leadership conference, Governor Lowe again highlighted global risks and reaffirmed the need for fiscal and structural policy to support the economy. Part of his justification here is that, when multiple nations are easing monetary policy in unison, it becomes more difficult for an individual central bank to boost their economy (at least in the short-term). This is because the immediate currency impact of easier monetary policy often nets out in these circumstances, and so the nation’s global competitiveness does not improve.
Over in New Zealand, the RBNZ met for their June meeting. As expected, they kept their cash rate unchanged at 1.50% but signaled that a near-term cut is likely – in line with Westpac’s August call. The press release noted twice that “a lower OCR may be needed” and the record of Monetary Policy Committee (MPC) meeting went further, with members agreeing that “more support from monetary policy was likely to be necessary” following a debate over the merits of an immediate cut.
The basis for this view is global economic uncertainty and its potential impact on New Zealand through trade, financial markets and confidence. On the domestic economy, the RBNZ’s views are mixed. Q1 GDP beat the RBNZ’s expectation, but the housing market has disappointed of late. On capacity, the outlook for employment and inflation was said to have weakened, further supporting the case for a cut.
Turning to the US, the focus was on Chair Powell who re-emphasised that risks are now front of mind for the Committee, particularly with respect to trade tensions and softer global growth. However, immediate policy action is not a given. While many “FOMC participants judge that the case for somewhat more accommodative policy has strengthened… [they] are also mindful that monetary policy should not overreact to any individual data point or short-term swing in sentiment”. In addition, Bullard, one of the FOMC’s most dovish members, tempered market speculation on a 50bps cut in July, stating this “would be overdone”.
Our base case remains September and December 25bp rate cuts by the FOMC to offset the effect of current trade tensions on business investment and consumption so as to sustain GDP growth around trend. But, if trade tensions between the US and China escalate this weekend, then the timing of these cuts could be brought forward to be in line with market pricing, beginning in July.
Press reports ahead of the meeting between President Xi and President Trump imply a high hurdle for an easing of tensions, both this weekend and in coming months. China has asked for the existing tariffs and the action against Huawei to be overturned before negotiations recommence. In stark opposition, President Trump wants all his demands met before he will stop threatening a further escalation of tensions let alone a reversal of implemented measures. With the meeting scheduled for Saturday, a clearer view of the outlook should be available by Monday.