Relief rally for stocks
Spooked by some electric moves in bond markets, President Trump announced a temporary relief in the most acute of his tariff plans for 90 days, allowing financial markets some desperately desired respite overnight.
Of course, the tariff problem hasn't gone away entirely, and the world still faces what is effectively the biggest increase in tariffs since the 1930s.
Trump's plans will still see China facing a tariff rate of 125 per cent, while the reciprocal tariffs from China have now come into effect at an eye-watering 84 per cent rate.
Monetary easing
At the close of trade yesterday, markets were pricing five interest rate cuts for Australia over the 12 months.
Although stock markets locked in a massive relief rally overnight, government bond yields in Australia appear to be much more circumspect about our growth prospects.
Presumably this is due to the likelihood that the massively disruptive tariffs between the US and China will remain in place, with Australia being seen as something of a proxy for growth in the Chinese economy over recent decades.
China is already experiencing a bout of deflation, and the trade diversion ensuing from tariffs could result in a deflationary shock for Australia, at a time when oil prices have also plummeted.
The Aussie dollar has bounced a little to 61½ US cents, but the 3-year government bond yield in Australia is still trading at only 3.34 per cent, almost a full percentage point lower than we've seen at various junctures through 2023 and 2024.
National Australia Bank has leaped forth with a call for an emergency 50 basis points cut in the cash rate target in May, followed by further rate cuts in July, August, November, and February.
If this transpires it would take the cash rate target down to 2.60 per cent.
This sounds very aggressive to me, but things are obviously changing very fast at the moment.
You can read NAB's markets note
here.
The wrap
Yesterday's markets emergency may have passed, but the key issues remain unresolved, and Trump seems very unlikely to back down in full.
If you didn't catch our webinar last night, I have a number of podcasts going live over the next week or so where I've variously discussed what this will all mean for property with Chris Bates, Michael Yardney, Eric Wu, and Cameron Kusher.
Stay tuned for those episodes...
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