From a new Lunatic RBA FOI.
“In the extreme scenario, weaker export demand, and slower growth would be disinflationary, putting downward pressure on policy rate expectations, government bond yields and the Australian dollar.”
“Equity prices would likely decline as earnings expectations are revised down.”
In a more moderate scenario, the bank said there would be “tension between the better global growth outcomes versus proximity to the still adverse outcomes for China”.
“Overall, we judge that this will still be slightly negative for domestic growth with some modest downward pressure on policy rate expectations and the Australian dollar, but equities and yields could be higher via spillover from the US,“ it said.
Mr Trump’s threatened 10-20 per cent tariff hike on all US trading partners would have less of an impact on Australia than its trade measures against China because Australian exports to the US accounted for only a small portion of GDP, the central bank’s analysts said.
The warning, which predated Mr Trump’s emphatic election win less than a month later, said a “Republican sweep” would have the “greatest implications” for markets, monetary and macroeconomic policy when compared with other potential results.
Markets seem to be taking the appointment of Scott Bessent to Treasury as some security blanket.
The only comfort it provides, I think, is in the sequencing of policy. Bessent is likely to be sensitive to the growth impacts of tariffs and therefore more likely to ensure tax cuts come early as an offset.
But one need only look back to Trump 1.0 to understand that tariffs are coming as promised.
Goldman’s Gary Cohn ushered through the tax cuts and then resigned as Trump pivoted to tariffs.
The “red wave” probably means Trump 2.0 can do both at the same time and Bessent won’t stop him.
The RBA should be pivoting dovish on Trump 2.0, so long as it gets over its commitment to looking backwards.
