Daily Commentary BY THE CURVE TEAM –

Fed Airs Concerns on Trade War

27th of June, 2018

There wasn’t a great deal added to the recent narrative overnight in what was a relatively quiet night on data and price action fronts. Something worth noting was the growing concern from Fed members on the potential impact the trade battle could have on the economy.

Locally the lack of data and events has meant the focus has remained on the ongoing tightness in funding markets. The sustained funding pressure, evident in the increase in benchmark rates such as BBSW as well as higher credit margins are forcing ADIs to pass on further increases in mortgage rates over recent days.

While it was a relatively calm night offshore, the key point worth noting is the growing concern over the fallout from the trade wars.

Some at the Fed, such as  Dallas President, Robert Kaplan, think “intellectual property rights and technology transfer are a big issue” and that the US should  “fight what is actually a very big threat, which is the relationship with China”.

However that fight comes with consequences. The Boston Fed President, Raphael Bostic aired his concerns overnight, saying “the more it progresses in this more contentious way, the more it leads me to feel the risks are on the downside for the broader economy.” 

Importantly, he went on to add that “the disruption that comes from this type of trade war is not going to be good for the cost basis for businesses and it makes me a bit concerned how robust the economy will perform moving forward”.

This tricky situation is unlikely to resolve itself quickly and I get the sense that the market is yet to fully factor in the ramifications of a drawn out trade battle.

David Flanagan

Director - Interest Rate Markets