Suffice it to say risk appetite, notably for equities, evaporated sending government bond yields to even lower levels. Germany, an economy at notable risk from a further downturn in global trade, saw its 10-year yield tumble to a new record low of -0.58% accentuated by data that showed industrial output fell by 5.2% over the year to June -- its worst outturn since 2009. Whereas in recent times falling bond yields had driven equity prices higher, sentiment appeared to be turning to the view that it was now a clear signal for a worsening economic outlook across the globe in which the actions of central banks (or perceived lack thereof in the case of the US Federal Reserve) might only have limited impact.
In that context of increasing trade tensions, fears of currency devaluations and a deteriorating global outlook, no fewer than 4 central banks in the Asian region, including India, Thailand, Philippines and New Zealand delivered interest rate cuts. Across the Tasman, the Reserve Bank of New Zealand cut its Offical Cash Rate by 50 basis points to 1.0%, which was deeper than the 25 basis point cut the markets had anticipated. The accompanying statement outlined that the Bank's policy-setting committee debated the relative merits of a 25 or 50-basis point cut and ultimately reached the determination that the latter was necessary "to continue to meet its employment and inflation objectives". The decision was made particularly notable by the latest employment data that showed the nation's unemployment rate defied expectations for a rise to 4.3% by instead falling from 4.2% to an 11-year low of 3.9% in Q2.
Also helping to improve market sentiment, China trade data for July came in stronger than anticipated on Thursday. Exports swung from -1.3% to +3.3% through the year, perhaps reflective of a bringing forward in demand ahead of the introduction of new tariffs, while imports contracted by 5.6% against expectations for a much more sizeable decline of 9.0%. However, risk aversion came back on Friday as President Trump said he could cancel trade talks with China that are due to take place in September sending equities lower to lock in losses for the week.
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Domestically events this week were heavily focused on the Reserve Bank Australia. As expected, the Board held the cash rate steady at 1.0% on Tuesday (reviewed here). In his decision statement, Governor Philip Lowe highlighted that "increased uncertainty" surrounding trade tensions kept the risks to the global economic outlook "titled to the downside", while downgrades to the domestic outlook were signaled thus resulting in the Board firming its easing bias by noting a preparedness to "ease monetary policy further if needed" to support its inflation-targeting objective.
On Friday, the RBA published its Statement on Monetary Policy for August in which its updated set of forecasts confirmed a deterioration in the Bank's outlook for the domestic economy. For 2019, GDP growth was lowered to a below-trend pace of 2.5% from 2.75%, though it is still expected to return to trend (2.75%) in 2020 before lifting again to 3.0% in 2021. Little progress is expected to be made in reducing the spare capacity in the labour market that the Board has been discussing over recent months with the unemployment rate remaining around its current 5.2% level out to the end of next year, whereas in May its forecast was for a decline to 5.0%. With the unemployment rate now not expected to fall to 5.0% until mid-2021, headline inflation is not seen hitting 2.0% before then, with the outlook for 2019 and 2020 lowered by 0.25ppts to 1.75%. The forecast for the Bank's preferred inflation measure (trimmed mean) in 2019 was lowered from 1.75% to 1.5% and was downgraded from 2.0% to 1.75% in 2020, meaning that it is not expected to reach to the lower band of the target range before mid-2021. It is important to highlight that these downgrades come despite incorporating an additional two 25 basis point rate cuts (cash rate of 0.5%) as implied by market pricing (the first by November 2019 and the second by February 2020) and a lower Australian dollar in both trade-weighted and US dollar terms.
Also on Friday, Governor Lowe, his deputy and assistant governors appeared before the House of Representatives' Standing Committee on Economics for the Bank's semi-annual testimony. In his opening statement, the governor highlighted while the Board was now in wait-and-see mode given it cut the cash rate in June and July, the downgrades in August's quarterly statement meant that "the possibility of lower interest rates will remain on the table". To that end, when questioned, the governor said that while unlikely "it's possible that we end up at the zero lower bound" before going on to say "we are prepared to do unconventional things if the circumstances warranted it". Discussions within the RBA on what form those measures could potentially take appear to be only at a very early stage, though the governor outlined that the unconventional measures taken by other central banks across the world had been examined to try and identify what actions could work within an Australian context.
In terms of data this week, Australia's trade surplus surged past $8.0bn in June to a new record high (shown as our chart of the week, below) driven by the tailwind from an escalation in iron ore prices (note prices retraced sharply over the past week) and weakness in imports (reviewed here). Meanwhile, there were early signs that the recent pick up in sentiment in the housing market following May's federal election is flowing through to demand for housing finance with lending commitments the owner-occupier and investor segments rising together in June for the first time since May 2018 (reviewed here).
Chart of the week
On Friday, the RBA published its Statement on Monetary Policy for August in which its updated set of forecasts confirmed a deterioration in the Bank's outlook for the domestic economy. For 2019, GDP growth was lowered to a below-trend pace of 2.5% from 2.75%, though it is still expected to return to trend (2.75%) in 2020 before lifting again to 3.0% in 2021. Little progress is expected to be made in reducing the spare capacity in the labour market that the Board has been discussing over recent months with the unemployment rate remaining around its current 5.2% level out to the end of next year, whereas in May its forecast was for a decline to 5.0%. With the unemployment rate now not expected to fall to 5.0% until mid-2021, headline inflation is not seen hitting 2.0% before then, with the outlook for 2019 and 2020 lowered by 0.25ppts to 1.75%. The forecast for the Bank's preferred inflation measure (trimmed mean) in 2019 was lowered from 1.75% to 1.5% and was downgraded from 2.0% to 1.75% in 2020, meaning that it is not expected to reach to the lower band of the target range before mid-2021. It is important to highlight that these downgrades come despite incorporating an additional two 25 basis point rate cuts (cash rate of 0.5%) as implied by market pricing (the first by November 2019 and the second by February 2020) and a lower Australian dollar in both trade-weighted and US dollar terms.
Also on Friday, Governor Lowe, his deputy and assistant governors appeared before the House of Representatives' Standing Committee on Economics for the Bank's semi-annual testimony. In his opening statement, the governor highlighted while the Board was now in wait-and-see mode given it cut the cash rate in June and July, the downgrades in August's quarterly statement meant that "the possibility of lower interest rates will remain on the table". To that end, when questioned, the governor said that while unlikely "it's possible that we end up at the zero lower bound" before going on to say "we are prepared to do unconventional things if the circumstances warranted it". Discussions within the RBA on what form those measures could potentially take appear to be only at a very early stage, though the governor outlined that the unconventional measures taken by other central banks across the world had been examined to try and identify what actions could work within an Australian context.
In terms of data this week, Australia's trade surplus surged past $8.0bn in June to a new record high (shown as our chart of the week, below) driven by the tailwind from an escalation in iron ore prices (note prices retraced sharply over the past week) and weakness in imports (reviewed here). Meanwhile, there were early signs that the recent pick up in sentiment in the housing market following May's federal election is flowing through to demand for housing finance with lending commitments the owner-occupier and investor segments rising together in June for the first time since May 2018 (reviewed here).
Chart of the week
