Uncertainty for markets was, at the margin, lessened by the trade deal struck between the US and Japan this week. The deal has secured a 15% tariff on Japanese imports, down from an initial rate of 25%, while the sectoral tariff on auto imports was lowered from 27.5% to 15%. Japanese equities were the top performer this week adding more than 4% on the back of the deal. The optimism also spilled over to US and Asian equities, reflected also in the cyclical EUR and AUD advancing against the USD. The reprieve may not last long though, with markets waiting on other trade deals ahead of the August 1 deadline. There is also a Fed meeting for markets to navigate as President Trump has continued his criticism of the central bank.
It was a quiet week in the US with limited data and the Fed in its blackout period ahead of next week's meeting. Trump has maintained his pressure on the Fed to lower rates, but there is next to no chance of that happening next week going by market pricing. A September or December cut is, however, being weighed up. In addition to the Fed meeting, next week sees the August 1 deadline imposed by Washington for trade deals fall and the July nonfarm payrolls report comes through on Friday.
After delivering 8 rate cuts since June last year - the last 7 coming at consecutive meetings - the ECB left its key rates unchanged this week, with the depo rate - the main rate for monetary policy - held at 2%. With inflation sitting on the 2% target, ECB President Lagarde said in the post-meeting press conference that it was now a 'wait-and-watch situation' for the central bank amid the trade negotiations taking place between the EU and Washington.
The level of tariffs the US ultimately imposes on European goods and whether or not the EU retaliates bear significant uncertainty over the inflation outlook in the euro area. A strong euro - also a factor for the inflation outlook - is something Lagarde said the ECB was 'monitoring'. But trade is the main game and in the absence of greater clarity here the ECB seems to be at the point where it has taken rates down as far as it is prepared to go. According to a Reuters article quoting ECB sources 'a significant deterioration in growth and inflation' would be needed to unlock further monetary policy easing. Markets price one further 25bps cut by year-end.
Further insights on the RBA's decision to hold rates steady - against widespread expectations for a 25bps cut - earlier this month came to hand via the meeting minutes and in a speech from Governor Bullock. In the end analysis the Board held the cash rate at 3.85% on the basis that cutting rates for a third time in its past 4 meetings wouldn't have been consistent with either the data or its 'cautious and gradual' to removing policy restriction. Back on decision day, Bullock said the direction was more about timing than direction - and the minutes back that up.
Key judgements were that rates at their current level were 'modestly restrictive' and that 'all members' agreed that further easing was warranted, based on the inflation outlook. Governor Bullock's speech focused on the dual mandate - 2-3% inflation and full employment - of the RBA, giving fresh insights on the latter. The uptick to 4.3% on the unemployment rate in June does not appear to have perturbed Bullock. While there were signs of easing in the labour market identified from reduced hours, lower job vacancies and less churn from people switching jobs, the RBA's view is that conditions remain on the tight side.
