Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.
Central banks go soft on monetary policy:
- Australia cuts its benchmark rate
- US Fed holds off on a cut but flags a couple are on the way
- The US consumer still displaying confidence!
We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.
The Big Picture
After nearly three years of keeping interest rates on hold, the Reserve Bank of Australia (RBA) cut its benchmark Cash rate from 1.5% to 1.25% on June 4th, and again on July 2nd. These cuts were widely anticipated as the easing cycle had been flagged in various speeches by senior RBA personnel. The big question is, of course, what next?
For long term investors, there is no need to be overly concerned by every cash rate adjustment by the RBA. We just need to know that monetary policy is managed responsibly – and that the government is acting on the promised tax breaks.
Our unemployment rate again came in at 5.2% p.a. and the first NAB business surveys of business confidence taken after the election were mildly positive.
The US Federal Reserve (Fed) did not cut rates, as was widely expected, but it did remove the word ‘patient’ with respect to its policy stance from its press release. US Official rates look set to be on the move back down after last being increased in December 2018.
In the previous meeting of the US Federal Open Markets Committee (FOMC) held in March 2019, 11 committee members predicted rates to be on hold for 2019 with four members predicting one hike and another four predicting two hikes in the remainder of 2019.
This time around one member even voted for a cut on the day and eight predicted cuts during 2019. The market is predicting a good chance of more than two cuts this year. We feel that outcome is unlikely because there are no clear signs of problems. The proposed cuts are seen as being more pre-emptive than reactive.
The European Central Bank (ECB) and the Bank of England have also kept official rates on hold but the Reserve Bank of India (RBI) made its third cut in rates in 2019. However, the RBI interest rate stands at 5.75%!
Central banks around the world are moving to an accommodative stance which is one half of the equation. The G-20 meeting held at the end of June in Osaka canvassed the need for some coordinated fiscal response – the other half required – to complete the economic management picture.
The G-20 was set up just after the onset of the GFC to coordinate global economic management. In recent times, the G-20 has been behaving more like a G-2 with 18 spectators. The main focus of all is on the US-China trade negotiations.
US President Trump and Chinese Premier Xi, in a lunch immediately after the G-20, agreed to resume negotiations and no new tariffs are planned. Trump was quoted as saying, “We are back on track”.
The US economic data released in June were a bit mixed. On the positive side, retail sales grew by +0.5% for May and the April figure – initially reported as 0.2% – was revised upwards to +0.3%.
The US new jobs data for May came in well below the expectations of 180,000 at 75,000. Those numbers do get revised and also jump around so that alone does not worry us necessarily. On top of that, the unemployment rate remained at a very low 3.6% and the wage growth rate was a creditable 3.1%.
Since Trump has begun his re-election campaign there are bound to be flurries of negativity from his opponents. We focus on the facts – and facts in context. There are no reasonable grounds to state that US economic data are pointing to a major slowdown. Of course, times can change so we will continue to monitor any material economic data output.
Data points from China were also a bit mixed. Retail sales data impressed to the upside but its industrial output figure missed expectations.
A very good financial year for share markets has just ended and the next is set to start smoothly.