Bassanese Bites: RBA to cut – Week beginning: 01 July 2019

The main development last week was the US Federal Reserve’s decision to give the market a “reality check” with regard to how far and how quickly it is likely to cut interest rates this year.  Judging by comments from Fed chair Powell, the US still seems likely to cut interest rates next month – if only because inflation remains stubbornly benign – but a hoped for 0.5% cut seems unlikely. Given the still reasonable underlying strength in the US economy, it seems premature for the market to expect much more. With Friday’s reading on US core annual consumer price inflation holding at only 1.6% in May, the good news for markets is that the Fed can cut rates even without the economy slowing unduly anytime soon.

The other key market focus was, of course, US-China trade tensions.  Although markets spent the week losing hope that a trade “deal” would be unveiled at the weekend G-20 meeting, they were nonetheless delighted that at least a “truce” of sorts was ultimately announced.  Yet all this meant was that the two sides agreed to keep talking and Trump would delay (for now at least) plans to impose a 25% tariff on the remaining $US300 billion in Chinese imports not yet subject to this levy.

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