Daily Commentary BY THE CURVE TEAM –

Inflation the Key, Trade Wars Continue

25th of July, 2018

CPI data will be the focal point in Australia today with the latest inflation read key to the outlook for monetary policy. Offshore and the fallout from the early exchanges of the trade war has seen the two main countries turn to stimulus to soften the impact.

Today’s inflation data will be closely watching in the context of it’s impact on the outlook for monetary policy. Current expectations are for a rise in both the headline and core readings of 0.5%. If the data falls in line with estimates, the annual rate for the headline index will sit just inside the RBA’s 2-3% target band while the core rate will fall just below the target band.

With wages growth still anchored around 2% there is little expectations of an large upside surprise in the core reading which is the measure the RBA watches more closely. There could be some volatility in the headline index after some large swings in some key prices like petrol over the quarter. The release is scheduled for 11:30 this morning.

Offshore and the US administration’s trade will be in the headlines again tonight as President Trump heads to Europe for discussions on trade and tariffs.

While the trade war is far from over, the two key protagonists so far, the US and China, have made moves to soften the impact of the increase in tariffs that have already been announced.

Further to a recent lowering in reserve ratios for its banks designed to release more money into the system, China announced further stimulus measures over the last couple of days to help further boost growth. The measures range from tax cuts to infrastructure spending and new loans to business.

The US has also announced some stimulus measures with a $12bln package put together to help US farmers.

This stimulus announcements have helped improve sentiment in markets but its unlikely to be enough to offset the long term damage of a prolonged global trade war.

David Flanagan

Director - Interest Rate Markets