Last week the Reserve Bank left the cash rate at 1.50% unchanged since August 2016. In the Board minutes, weak consumer inflation and wage inflation were cited as ongoing concerns as inflation continues to track below the Bank’s core target of 2%-3%. Some market observers have fixated on the reference to leading indicators as a sign that wage inflation may be reappearing. However, the Board was content with leaving policy settings unchanged and its Statement reflected this with minimal changes from the February 6 session.

GDP data released this week showed the economy grew 0.4% in real terms for the December quarter (2.4% year-on-year). The main drivers were household and government consumption as well as government investment driven by state infrastructure projects in New South Wales and Victoria. Notable detractors included Net Exports (dropping 0.5%) with prices of exports falling (9.7% in real terms for rural commodities) while import prices rose with the weakening of the Australian dollar over the quarter. This decline in Net exports had been signalled earlier in consensus forecasts predicting a contraction of 0.6% for the quarter with the trend further confirmed in the expansion of the current account deficit recorded in Tuesday’s Balance of payments release.

In other monetary policy news, the European Central Bank left their policy settings unchanged. However, the ECB also dropped its pledge to “increase asset purchases if necessary” signalling confidence in the strength of the euro area economy.

The broader market was initially weighed down by last week’s announcement of US tariffs and the international backlash to this policy with fears of international trade wars rising. Of particular concern for some Australian companies was the possibility that they would not be excluded from the regime with negative implications for the likes of BlueScope Steel and Rio Tinto. The White House has appeared to walk back on its earlier statements with carve outs made for both Canada and Mexico and room for negotiating with other trading partners including Australia.

These concerns were ultimately shrugged off given the softened outlook for the tariff and the S&P500 was up almost 2% in the week to date ahead of the upcoming US payroll data release. The ASX was also up but dragged down by the flat and negative performances of the financials and materials sectors respectively.

The Australian dollar performed well against the Yen this week up over 1% as traders retreated from the safe-haven currency when the tariff picture became clearer. Aluminium and iron ore prices also retreated. The aluminium weakness was due to a mix of concerns over the tariffs by the Trump administration that have now been implemented as well as excess supply in the case of aluminium. Iron ore likewise was affected by concerns over a possible trade war between China and the U.S. and weak Chinese demand. Global news dominated the fixed income space with the RBA decision to keep rates on hold swamped by renewed appetite for risk as both Australian and US bond yields rose slightly over the last week.

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