Daily Commentary BY THE CURVE TEAM –

Fed Tightening to Continue Despite Trade Concerns

6th of July, 2018

The Fed minutes overnight reflected a similar approach as the RBA as they continue to chart a course for their central view while recognising the risks. To that end, rate hikes are set to continue but the Fed is closely watching the trade war, especially with China, that goes live today.

Rate rises are going to continue on at a gradual pace in the US if the data continues to evolve as the Fed expects. That was the core message from the June Fed minutes overnight as they continued to point to tightening labour markets and inflationary pressures that are becoming more prevalent.

The Feds mantra is very similar to that of our RBA, in that they will continue to chart a course reflection of their central view while keeping an eye on the risk that pose a threat to that view.

One of the big threats that the Fed continues to identify, and something that the RBA pointed out again in the statement to their July meeting, is the potential fallout of the trade war that goes live today.

The minutes from the Fed’s June meeting said that “uncertainty and risks associated with trade policy had intensified”. They then added that they “were concerned that such uncertainty and risks eventually could have negative effects on business sentiment and investment spending”. 

At the margin, the uncertainty around the trade wars is already having an impact with the minutes also saying that “contacts in some districts indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy”.

In the same way that the RBA is waiting and assessing the incoming data to see if risks to the outlook are materialising, the Fed will do the same on the impact from the trade wars.

We won’t have to wait long to see how the market reacts with the first wave of the US tariffs on China scheduled to come into effect today. The first of $34bln in tariffs on 818 Chinese imports will be collected from midnight tonight in the US. The retaliatory Chinese tariffs on US goods are expected to follow shortly after.

If that isn’t enough to keep markets on edge, we get the most important data release of the month tonight with nonfarm payrolls in the US scheduled for release.

We could have plenty to write about come Monday.



David Flanagan

Director - Interest Rate Markets