Daily Commentary BY THE CURVE TEAM –

Monetary Policy Divergence Continues

30th of April, 2018

The latest data on Friday night highlighted the varying performance of developed economies. It reinforced the divergence in monetary policy outlooks amongst these economies ahead of a big week of central bank activity.

Friday’s data from either side of the Atlantic confirmed the synchronised upswing in global growth is starting to dissipate.

Growth in the UK for the first quarter came in well below estimates at a meagre 0.1%, undermining the BoE’s outlook and in the process hitting the GBP pretty hard. Meanwhile in the US, first quarter GDP came in a little ahead of estimates with the economy growing at around 0.6% for the quarter.

While the US performance has been much stronger than most in relative terms, the result wasn’t without concerns. Consumer spending slowed markedly from a solid 4% pace in the fourth quarter to 1.1% in the first quarter of 2018.

From a broader perspective, the global data pulse is certainly weakening, judging by the economic surprise indices. These surprise indices track economic performance against expectations. The G10 index has fallen from 36 to -19.1 over the past 12 weeks.

However the performance by country has varied significantly. The US is little changed and China has improved. The US has fallen from 14.9 to -51.7 and the EU has collapsed from 34.1 to -83.4.

Australia has also experienced a marked slowdown with our index falling from 25.8 to -30.7.

These developments are important ahead of a big week of central bank activity. While the Fed will be meeting in the US, the key will be RBA activity here in Australia.

While no change in the cash rate is expected, there will be plenty of opportunity for the RBA to tweak its rhetoric. We have the monthly board meeting tomorrow and subsequent accompanying statement. Governor Lowe will then be speaking in Adelaide Tuesday night before the quarterly Statement on Monetary Policy will be released on Friday.

David Flanagan

Director - Interest Rate Markets