Trump’s trade war may force RBA’s hand

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Recent comments from RBA governor Philip Lowe have highlighted the importance the central bank is placing on the labour market as a determinant for its monetary policy decisions. In particular, Lowe flagged that a lift in the unemployment rate could be a decisive factor for a move lower to 1.25 per cent.

The median forecast from economists surveyed by Bloomberg is for the economy to have generated 15,000 jobs in April, which should be enough to maintain the jobless rate at 5 per cent. A sizeable minority of the surveyed experts, however, predict a tick higher to 5.1 per cent.

Economists generally believe that the central bank will wait for more sustained evidence of a worsening in labour market conditions before it is moved to cut, especially given the notorious volatility of the monthly labour data.

“We struggle to believe the bank will ease on a single month of higher unemployment,” ANZ head of Australian economics David Plank said.

“If the unemployment rate prints at 5 per cent or 5.1 per cent, we believe this is consistent with the RBA remaining on hold in June,” NAB economists said.

But the revival of the US-China trade conflict may change the equation for monetary policymakers, said Steve Miller, an adviser to Grant Samuel Funds Management and veteran bond investor.

“Since those updated RBA growth forecasts were put to bed the risks have intensified because of the trade developments, and the hurdle for a rate cut will be even lower,” Mr Miller said.

“I suspect that if unemployment rises [from 5 per cent this Thursday] then we will get a cut next month. I think the hurdle is that low.”

Last week’s RBA Statement on Monetary Policy noted that “trade tensions remain a downside risk to the global outlook”.

“There is also a risk that the US administration increases automotive tariffs; this would particularly affect US trade with the European Union and Japan,” the statement noted. “Any negative developments on trade policy could harm global growth.”

A tweet from US President Donald Trump at the start of last week criticising China and announcing plans to increase tariffs on Chinese imports upended global markets and delivered what one analyst called “the most significant market correction of 2019”.

On Friday the US announced it would increase tariffs on $US200 billion of Chinese goods to 25 per cent from 10 per cent. Tariffs on the remaining $US325 billion worth of imports could be implemented as soon as July.

US shares suffered their worst week in 2019, falling 1.9 per cent over the five sessions as high hopes of an imminent trade deal between the two economic superpowers collapsed, catching investors off guard.

“Higher tariffs are the flashpoint with the most potential to fully reverse this year’s gains in all major cyclical assets,” JPMorgan cross-asset strategist John Normand said.

“The reason is simple: tariffs are the single-biggest threat to global growth and earnings now that the Fed is on hold, and markets do not carry a risk premium for another conflict.”

Analysts remain warily upbeat around the prospect for a deal to be done in the coming weeks or months, but admitted a high degree of uncertainty that would likely drag on market performance and economic growth.

“As the uncertainty effect from the anticipation of the additional tariffs starts weighing on the Chinese economy, we would expect China to look for resuming trade talks before the tariffs are actually implemented,” Citi economists said. “Thus, we remain cautiously optimistic of a trade deal in [the June quarter].”

Patrick Commins reports and comments on trends and news in domestic and global investment markets.

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