Daily Commentary BY THE CURVE TEAM –

Geopolitics, Fed & RBA All In The Spotlight

12th of April, 2018

A lot to digest over the last 24 hours with a number of developments taking place. Geopolitical tensions between Russia and the US have been thrust back into the spotlight while the Fed minutes of the March meeting looked a little hawkish, only to be complimented by the latest run of US inflation data. While back home and RBA Governor Lowe paints a clearer picture as to where monetary policy is heading.

Away from the usual trade talk, the US is making headlines for other reasons overnight. This time geopolitical tensions between Russia and the US were the focus as the President Trump warned Russia to not get involved with the ongoing crisis in Syria. Trump tweeted,

Russia vows to shoot down any and all missiles fired at Syria. Get ready Russia, because they will be coming, nice and new and ‘smart’”

Still in the US and the minutes from the Fed’s March meeting pointed towards a faster pace of rate hikes over the near term as the central bank becomes more confident in the outlook for growth and inflation. The minutes cited,

The appropriate path for the federal funds rate over the next few years would likely be slightly steeper than they had previously expected.

This notion was reaffirmed with the release of CPI data for March. While the headline rate slipped 0.1%, the preferred core measure lifted 0.2% taking the annualised rate up to 2.4%, from 1.8% in February.

While this is not the Fed’s preferred measure, the result bodes well for the Fed’s outlook for rates with at least another 2 forecast for the remainder of 2018.

Looking back home and RBA Governor was speaking yesterday on “Regional Variation in a National Economy” and he provided some colour as to the next chapter for the Australian economy.

He delved into the structural and cyclical factors at play within the economy and how they differ between states. The key however was in his final comments around what it all means for monetary policy.

While he continued to reiterate the notion that as employment conditions continue to tighten and wages lift gradually, we will see inflation return to target, the key point I took out of it came with Lowe’s comment,

it is more likely that the next move in the cash rate will be up, not down, reflecting the improvement in the economy. The last increase in the cash rate was more than seven years ago, so an increase will come as a shock to some people.

As the economy returns to more normalised settings, Lowe’s cautious view is directed at the level of household debt within the economy and as a result it will restrict the pace at which rates can be lifted. This is as the central bank does not want to put any further unnecessary pressure on consumers. As such, it is still our view that rates will not be going anywhere any time soon.

Oliver Parsons

Client Relationship Manager