- The US economy remains supported by robust consumer spending and jobs growth, but trade uncertainty is having a negative effect on business investment.
- Markets strongly expect the US Fed to lower interest rates at its September meeting as Powell stated the Fed would “act as appropriate to sustain this expansion.”
- The UK’s new prime minster Boris Johnson threatened to suspend parliament until 14 October if it does not agree to hold a general election.
- Chinese economic news has been on the soft side, with the impact of the trade war reflected in falling industrial production growth and a contraction in manufacturing.
- The Australian economy recorded its worst GDP result since the GFC, vindicating the RBA’s latest round of easing and setting expectations for further cuts.
The renewed bout of risk aversion through August and September reflected the escalation in the US-China trade and technology war, along with evidence of further slowing in the global economy. An inversion of the yield curve rattled markets, giving rise to the debate about the timing of the next recession and whether the US Fed was doing enough to fight the slowdown.
President Trump voiced his disappointment in the Fed’s “hawkish cut” at the end of July, announcing a 10% tariff on the remaining un-tariffed Chinese goods, valued at around US$300 billion. China followed suit with new tariffs of 10% and 15% against the remaining US$75 billion of US imports. Equity markets tumbled in unison with the decline in bond yields, while the US 30-year yield moved below the 2.00% level for the first time.
Europe’s slowing growth is leading to weak inflation, with the core CPI (excluding food and energy) steady at 0.9% in August having fallen from 1.1% in the previous month, while headline inflation was steady at 1.1%, well below the ECB’s 2.0% target. The weak June quarter GDP numbers and the soft growth outlook together with recent falls in inflation have led the ECB to consider a range of stimulus options to ensure that inflation does not persistently undershoot.
The ratcheting up of the US-China trade war in early August caught markets by surprise. US President Trump signalled his intention to place a 10% tariff on the remaining US$300 billion of Chinese exports to the US from 1 September. The announcement came just days after what were described as “constructive” talks in Shanghai, with Trump threatening to increase the tariff to 25% if China failed to move quickly to reach a trade deal. In the following days the USD/CNY currency pair broke through 7.0 US dollars, marking the weakest level for the yuan in 11 years.
The Japanese economy grew by more than expected in the June quarter. GDP grew 0.3% (1.3% year-on-year), which was lower than the 0.4% recorded by the flash estimate a few weeks prior but still better than the 0.1% originally anticipated by the market.
Australia’s GDP growth for the June quarter recorded only 1.4% year-on-year, the worst result since the GFC. While in line with expectations, the result highlights the challenging environment on the spending side of the economy, with state final demand (a broad measure of spending) recording zero quarterly growth in NSW. The unemployment rate was steady in August at 5.2% and the RBA expects this rate to hold through 2019 and 2020 before falling to 4.75% in 2021 (versus a previous forecast of 5.0%).