During a speech following the rate cut decision, Governor Lowe left open the possibility for further rate cuts by noting "the Board is prepared to adjust interest rates again if needed", though he once again called for additional support from fiscal stimulus and structural policies. To that end, news from Canberra this week would have come as a welcome development, with the federal government's income tax relief package passing through both houses. The three-stage plan commences immediately, highlighted by a doubling of the low and-middle-income tax offset to $1,080 for incomes between $48,000 to $90,000 applied to the previous financial year. Stages 2 (occurring in mid-2022) and 3 (in mid-2024) will have a lagged introduction, ultimately working towards flattening the nation's tax system so that an estimated 94% of taxpayers will face a top marginal rate no higher than 30%.
The RBA's rate cuts and the immediate tax relief measures look to be well-timed given that retail sales data for May showed that spending lifted by just 0.1% in the month following a 0.1% decline in April, while the annual pace slowed to its lowest since the start of 2018 at 2.4% (see our review here). Another positive is that surging iron ore prices are continuing to generate a strong tailwind for the government's tax receipts, with the nation's trade surplus hitting a new record high in May at $5.75bn thus providing the scope for further fiscal stimulus to be announced (see here).
In the housing market, data from CoreLogic showed that price declines continue to slow, with the national median easing by just 0.2% in June to be down by 6.9% over the year (see here). Notably, prices in Sydney (+0.1%) and Melbourne (+0.2%) posted their first monthly increases since peaking in July and November of 2017 respectively, though there were declines for most other capitals. Overall, conditions in the nation's housing market remain soft, though sentiment appears to have improved somewhat following the federal election outcome and the RBA's rate cuts. The announcement from banking regulator on Friday that it will remove its guidance for banks to apply a minimum interest rate of 7.0% (most had used 7.25%) within loan serviceability assessments, now allowing a buffer of at least 2.5% over the prevailing interest rate to be used also shapes as a key development (see here). Notwithstanding, the outlook for residential construction activity continues to remain weak with dwelling approvals down by around 20% over the year to May (see here).
—
Developments from offshore this week were highlighted by the G20 Summit in Osaka, where US President Trump and China's President Xi called a truce to their recent escalation in trade and technology tensions. In a best-case outcome for markets, the US and China agreed to re-start negotiations that had stalled since May, while President Trump pledged to suspend implementing a new tariff on a $300bn tranche of Chinese imports as well as scaling back restrictions placed on tech firm Huawei. These outcomes helped to set up a strong week for risk assets, though plunging yields were arguably a more significant factor as markets continued to price in aggressive policy easing from central banks across the globe over the next 12 months in response to growth and inflationary concerns, as shown in our chart of the week, below.
Chart of the week
Chart of the week
In the US, Federal Reserve rate cut expectations were tempered somewhat by Friday's employment data for June, which showed that non-farm payrolls lifted by a stronger-than-expected 224,000 in the month compared to the median forecast for a rise of 160,000. Meanwhile, the unemployment rate lifted against expectations from 3.6% to 3.7%, though that was accompanied by a rise in workforce participation from 62.8% to 62.9%. Growth in average hourly earnings on a through-the-year basis remained at 3.1%, which disappointed expectations for a rise to 3.2%. Overall, the report was strong enough to see markets dial back expectations for a 50 basis point rate cut by the FOMC on July 31, though they remain priced for a 25 basis point cut on the view that easier policy is required given the headwinds to the growth outlook from trade uncertainty and slowing business investment.
Over in Europe, the main development was that a meeting of the European Council nominated IMF Managing Director Christine Lagarde to replace outgoing European Central Bank (ECB) President Mario Draghi when his term expires on 31 October, though is subject to approval from the European Parliament. The markets interpreted this as a dovish move considering that the alternative, Bundesbank President Jens Weidmann, has been a noted hawk on the ECB's Governing Council. In the UK, Bank of England Governor Carney highlighted in a speech that while the labour market conditions are tight and inflation is at target, risks from global trade tensions and a no-deal Brexit were increasing.
