Daily Commentary BY THE CURVE TEAM –

It Is All Getting A Little Messy

14th of March, 2018

It is all starting to get a little messy and with so many moving pieces it’s difficult to know what to look out for and what is coming next. Geopolitical tensions and instability continue to fester away with ongoing talks of tariff action threatening the very fabric of global economic co-operation. Throw in a booming local Business survey, which is somewhat at odds with other data reads, and the equation gets even harder.

Geopolitical instability and uncertainty was once again the dominate theme overnight and overshadowed some key data. The US Administration is once again in the news as Rex Tillerson was shown the door via a tweet as his views were at odd with his boss. He is set to be replaced by the head of the CIA, Mike Pompeo, who is expected to push the ‘America First’ agenda with a little more gusto.

On that front there was more news on the tariff front, which could dwarf the already slated steel and aluminium tariffs. It appears as if China is next on the hit list, given their trade surplus is by far the largest of any nation by a factor of five. Reports suggest the Administration is preparing tariffs to the tune of $60bln on China, focused on tech and telecoms as punishment for intellectual property theft.

As we know markets don’t like uncertainty and there is no shortage of that around at the moment.

The news overshadowed the latest inflation report in the US. Both headline and core inflation were in line with expectations. It has been suggested that this is a sign that inflation pressures are not building and this reduces pressure on the Fed to tighten too quickly. I would argue that the Fed is set to hike at least three times, maybe four based on current data. So rather than interpreting the data as needing to improve further to justify hiking, I would argue the data needs to deteriorate to stop them from hiking.

Then we have the dichotomy in the local economy. The Nab’s monthly business survey continues to go from strength to strength with the conditions index rising to an all time high. There were a number of components, including the employment index that had some unusually large increases so we will need to see what happens next month to really know what’s going on.

What is clear is that businesses are having a good time of it at the moment. The question is, if business is doing so well, why aren’t we seeing it across the rest of the economy? I am only guessing here but with rates at record lows and not going anywhere while we continue to see strong population growth, businesses have the optimal operating environment. It is only a theory that squares the circle and explains why consumers are not as ebullient and wage growth is in the doldrums and GDP per capita has stalled.

The data keeps rolling today with the monthly consumer survey due out this morning followed by the monthly activity indicators from China. A bunch of ECB speeches will be worth keeping an eye on tonight before US PPI data is released.

David Flanagan

Director - Interest Rate Markets