Daily Commentary BY THE CURVE TEAM –

The FOMC, Expectations of a Trade Deal and Australian Growth

30th of November, 2018

There was plenty to digest over the past 24 hours as we head into what could be a huge weekend.

The FOMC released the minutes from their most recent meeting overnight and the core theme remained consistent. The emphasis remains on data dependance as the Fed Funds Rate moves closer toward the range of what might be considered neutral. The minutes still talk in terms of plural when it comes to future moves so we can expect another move this month with more to come next year.

What many seem to be overlooking is that the Feds move towards a move normalised policy setting doesn’t just revolve around the adjustment of the Fed Funds Rate. In normalising their setting of monetary policy, the Fed is both lifting the Fed Funds Rate and reducing the size of their balance sheet by running down assets it accumulated implementing three rounds of Quantitative Easing.

We are likely to get more clarity on the outlook for US monetary policy tonight with a speech due from New York Fed President John Williams who is somewhat known for speaking a little more candidly.

Then the focus will shift to the side meeting at the G20 by Presidents Trump and Xi. The big questions is whether or not we will get a deal when they sit down to talk trade. During the buildup a lot has been said and it is still unclear which way it will go.

I think there is just too much to cover is too short a space of time. Trump wants a lot of concessions from China not just on trade and the Chinese have shown limited appetite to conceded ground on most issues. I think the best we can hope for is a deal to do a deal. Time will tell.

The outcome of the G20 is important for Australia and Australian growth given our ties to China. On Australian growth for the third quarter and the partial indicators so far have been underwhelming. Construction work completed and Capital expenditure for the quarter both missed estimates pretty badly.

Construction work done was down 2.8% after it was expected to rise 0.9% while Capex was down 0.5% against expectations of a 1% rise. On the upside the outlook for capex lifted with expected capex over the coming year up over 4%. We will get more partial indicators of growth early next week ahead of the final release on Wednesday.

Today will see the latest credit aggregates from the RBA released which will be closely watch. Credit growth is the lift blood of the economy so where it goes, growth tends to follow and of late credit growth has been slowing.

David Flanagan

Director - Interest Rate Markets