The merry-go-round theme of markets continued last week with equities weakening, weighing on broader risk, weighing on currencies, weighing on bond yields which weigh on equities, and so it goes on.
With continued below trend growth, confirmed by the poor outcome of the June quarter GDP data last week combined with increased headwinds from offshore suggests that more stimulus could be needed from a combination of easier monetary policy, a lower Australian dollar and some broad-based government stimulus plan. There is also the lingering concern that Chinese shares will resume their slide when the stock market reopens after holidays last week.
In the US, analysts remain divided on whether the Federal Reserve will commence raising US interest rates this month or hold off until the global situation becomes clearer. On the one hand, the US labour market has strengthened significantly, and inflation is rising. On the other hand, current global financial sentiment is fragile and commodity prices are weak plus measures to head off the Yuan depreciation pressures are putting upward pressure on US bond yields as China reduces its FX reserves. The US dollar is strengthening and also causing pain to other currencies, including the Aussie that fell to a new six-year low last week.
The soft economic data releases last week have increased the chances of another RBA rate cut, albeit only slightly as the increased chance of a US rate hike this month has also increased, which is limiting any downside in domestic interest rates.
Implied cash rate pricing from the futures market