Macro (Re)view (28/6) | Markets focused on G20 developments

Attention in financial markets over recent sessions was focused on the weekend's G20 Summit in Osaka following confirmation that US President Trump and China's President Xi will meet on Saturday morning local time. Conflicting news reports have conditioned low expectations for substantive progress to be made in easing the tensions that have escalated since May. As it stands, China has called for compromise and the removal of existing tariffs, though US President Trump vowed again this week to tariff the remaining tranche of some $325bn of Chinese produced goods if sufficient progress is not made. A best-case scenario would appear to be an agreement to re-commence the negotiations that stalled in May, and potentially a truce on imposing new tariffs.

Also dampening sentiment this week, US Federal Reserve Chair Jerome Powell appeared to push back against some of the more aggressive expectations for policy easing during a speech in New York. While highlighting that the cross-currents relating to trade tensions and global economic growth have re-emerged, Chair Powell went on to say that the central issue for the Committee "is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation". Markets had discounted more than one rate cut occurring at the next meeting in July, so it was significant that Committee member and noted dove James Bullard said during a Bloomberg interview that a rate cut of 50 basis points "would be overdone" but was supportive of a 25 basis point cut. 

Notwithstanding the downside risks to the outlook, Chair Powell noted that "the economy has performed reasonably well" in 2019, as highlighted by Q1 GDP growth being confirmed at an annualised pace of 3.1% during the week. However, as our chart of the week (below) shows, output growth in the March quarter was underpinned by the typically volatile components of inventories and net exports and can thus be expected to reverse. Consumer demand also softened, and while business investment remained solid that pre-dates the latest escalation in trade tensions.  

Chart of the week

In Europe, while the data flow was limited this week, the tone was in line with last week's comments from European Central Bank (ECB) President Mario Draghi that additional stimulus measures will likely be required. The European Commission's Economic Sentiment Indicator fell to a near 3-year low in June at a reading of 103.3 reflecting weakness from industry, services, and consumers. Meanwhile, inflation on a headline (1.1%Y/Y) and core (1.2%Y/Y) was essentially as expected in June, though it remains well short of the ECB's target of below but close to 2%.          

The other notable development from abroad this week was the Reserve Bank of New Zealand's latest policy meeting in which the cash rate was left on hold at 1.5% (see here). Having cut interest rates in May, the Bank's Monetary Policy Committee retains a firm easing bias on the basis that the economic outlook, both domestically and abroad, had softened and thus presented downside risks to its employment and inflation objectives. As such, it was the assessment of the Committee "that more support from monetary policy was likely to be necessary". 

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Economic developments and data in Australia were light this week, while domestic markets were contained. Of note, Reserve Bank of Australia (RBA) Governor Philip Lowe featured in an ANU-hosted panel discussion (link here), outlining that in the current environment of global policy easing, the stimulatory impact of further reductions in the cash rate on the domestic economy is likely to limited due to a lesser depreciation in the exchange rate, while the benefit to the other transmission mechanisms (investment, wealth and cash flow) was described as "weaker at the moment". To that end, Governor Lowe reiterated the case for increased stimulus in the form of fiscal and structural reforms. Ahead of next Tuesday's RBA policy meeting, financial markets are around 75% priced for a 25 basis point rate cut, which is also the consensus call from economists according to Reuters. 

The main data point out this week was May's private sector credit growth figures (see here). The pace of credit growth slowed from 3.7% from 3.6% in through-the-year terms to a 5½-year low. For the 4th consecutive month, housing credit growth slowed to the lowest pace on record going back to the late 1970s at 3.7%Y/Y. Growth to the owner-occupier segment eased to 2015 levels at 5.3%Y/Y, while investor growth hit another record low of just 0.5%. Business credit growth remained unchanged at 4.5%Y/Y.