Weak global inflation data pushes most Central Banks towards rate cuts
Inflation remains weak the world over, driving Central Bankers towards rate cut expectations in many developed markets. Central Bankers are being forced to acknowledge that a decade of Quantitative Easing and low interest rates have not delivered on their promised inflation path, citing technology as being the major secular force restraining realised global inflation. The recent 2018 dip in oil markets has caused more anxiety as Q1 data rolls in, with many economies recording material sub-target inflation readings. Some of this can be dismissed as transient – a term recently used by US Federal Reserve Chair Powell – however, the size of undershoot looks likely to direct interest rate policy toward rates cuts and policy stimulus, which has been interpreted as good news for most asset classes.
RBA expected to cut by August
Domestically, Q1 inflation readings have pushed the RBA into a corner where they must now respond. JCB has been consistent in its expectation that the RBA will cut rates, and the expectation remains that this will commence by August of this year. Such a move will likely deliver a 50 basis points or 0.50% reduction in the cash rate to 1.00% by year-end, which will achieve three key stimulus measures. Rate cuts would help those with existing debt obligations, lowering their existing funding burdens. Such funding relief would also likely lift consumer confidence, whilst also pushing the currency lower, thereby making the Australian economy more competitive and allowing for higher growth in currency sensitive areas of the economy such as tourism, education and agriculture.
Whilst all the above measures will help the Australian housing market at the margin, JCB do not expect that such moves alone will re-energise property prices. Clearly this can help address some of the catalyst of the falls, however the price of money is not the major issue domestically, but rather the availability of credit which rate cuts do not address.
China/US “green shoots” are not green enough
Incoming data for the Chinese economy in March popped higher (delivered to markets in early in April) after vast stimulus by Chinese authorities spurred the economy forward. This generated a “green shoots” narrative for global markets which was also supported by better than expected US economic data. Given the shocking state of global trade and weak manufacturing data, such leadership was uniformly welcomed at first pass. JCB would caution against such optimism.
The Chinese polit bureau has already confirmed it does not plan on continuing such stimulus programs, meaning the temporary bounce will likely decay and cool again around mid-year. This big lift in China data was also helped by significant Chinese Lunar New Year seasonality, which usually suggests a giveback in the coming months.
Looking at US data, again whilst headline numbers seemed solid, the devil is very much in the detail. Consumption and expenditure which makes up ~70% of US economy fell to some of the weakest levels since 2014. Data remains patchy at best, with many leading data points like housing and auto sales continuing to show weakness, whilst lagging indicators are holding on.
“Sell in May and go away” – Volatility likely to lift into Northern Summer
Looking ahead, JCB believe there are a number of issues for markets to deal with through the dreaded Northern Hemisphere summer months. Volatility has returned to ultra-low levels ahead of several possible trigger points. Investors made similar mistakes in early 2018 and paid dearly for such dismissal of risks. Could it be European elections, European auto tariffs, the geopolitics of Iran or Gaza, or failed expectations of a positive US/China trade deal that could ignite the market from their seeming complacency? JCB feels the market is tinder dry, compensation for risk has been diminished by strong performance. Should a global spark arrive into mid-year markets things could heat up quite a bit.