Nervous investors looking for the silver-lining to the recent market volatility could catch a lucky break. The probability of an interest rate cut as soon as next month just went up!
The Reserve Bank of Australia (RBA) cut its forecast on consumption growth in its latest quarterly Statement on Monetary Policy released today.
The downgrade from our central banks comes as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index shedded around 0.3% of its value over the week as fears of a full-blown trade war surfaced following US President Donald Trump's terror tweets on Monday.
Here comes an interest rate cut?
Trump threat to lift tariffs on US$200 billion ($286 billion) of Chinese imports to 25% from 10% came to pass just a few hours ago and China said it would retaliate.
On the face of it, the downgrade by the RBA and the escalation in trade tensions between the world's two biggest economies are bad news for ASX investors.
But these developments have most certainly increased the chance of the RBA cutting the cash rate to a fresh record low in the coming months, although a move in June cannot be ruled out in my view.
"Subdued growth in household income and the adjustment in the housing market are affecting consumer spending and residential construction," said the RBA in its Statement of Monetary Policy.
"Underlying inflation has been lower than expected, at 1½ per cent over the year to the March quarter, with pricing pressures subdued across much of the economy."
When bad news can be good news (hopefully)
Our central bankers cut consumption growth to 2% from 2.75% this year That's a big cut, particularly given that domestic consumption contributes to 60% of Australia's GDP. This is why the RBA is predicting GDP for 2019 will come in at 2.75% compared to its earlier forecast of 3% that is made last year.
It feels like the RBA is talking itself into a rate cut and the growing trade hostility between the US and China will give the board extra impetus to stimulate the domestic economy as global economic activity is forecast to slow as trade barriers rise.
ASX investors will find themselves at the pointy end of any trade war. Our market has been buoyed by strength in our mining sector as our banks took a beating from the slumping housing market and the Banking Royal Commission.
Foolish takeaway
If China's economy slows as it will during a protracted trade war, then we can't count on the likes of BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) to pull us out of the funk.
You also can't bank on a recovery in the housing market to boost the likes of Commonwealth Bank of Australia (ASX: CBA) and friends either as the unemployment rate is also certain to rise if commodity markets beat a hasty retreat.
The RBA knows this and its never been under more pressure in the past few years to cut rates. Let's just hope that will be enough to offset the rising global headwinds.
