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Weekly Economic Commentary

Weekly Economic Commentary

Categories: General, General

Another week on and the “Trump trade” continues to propel risk assets higher but the overall market tone remains tentative. Donald Trump has begun his Presidency with a flurry of tweets, policy announcements and executive orders swinging markets both ways, but without a clear story as yet. He has reversed key Obama decisions (e.g. TPP, NAFTA, the Keystone pipeline, Obamacare) rather than constructive policy change so far. Contentious conversations with the leaders of Australia and Mexico - coming on the heels of accusing Japan and Germany of currency manipulation - have thrown relations into disarray.

The narrative, if there is one, can be described as “oppositional” at the moment. So far, Trump has broadly delivered on his pre-election promises, suggesting he will deliver on his economic plan as well, which is why markets are pushing higher. Financial markets however are still waiting and watching rather than drawing conclusions but higher yields and a steeper yield curve are expected.

Locally, we have the first RBA board meeting of the year this week. While an RBA rate cut seems a long way off, recent economic data (especially the record trade surplus) has once again revived talk of another possible cut – albeit remote. The market could very easily move to price in RBA rate hikes once again if global market sentiment turns.

While short term uncertainty prevails and financial futures have not unwound the slight probability of another rate cut this year, in the longer term, futures still have interest rates rising next year (refer below).

Interbank Futures pricing of the official cash rate

Interbank Futures pricing of the official cash rate


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Source: Rural Bank

 

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