Fearing Trump's tariffs, one bank has ratcheted up rate forecasts - in Australia

By Steve Goldstein

Analyst also has plotted house prices vs. gold

In the world of finance everything's connected - but even to seasoned observers, it's not immediately obvious how the possibility of former President Donald Trump returning to office would impact interest rates in quite literally the opposite site of the world.

Yet that is the view expressed by Benjamin Picton, senior macro strategist at Rabobank, who just removed from his Reserve Bank of Australia rate forecast expectations of cuts due to the possibility of a Trump presidency.

Truth be told he doesn't spend much time on Trump. In a note to clients, he says the RBA will have to hike rates in August and November because it went slower than other central banks in increasing rates and is facing inflation that's hotter than peer economies.

In the first quarter, the year-over-year rate of headline inflation in Australia was 3.6%, and it was 4% for what's called trimmed mean inflation.

That's not wildly out of step from the rest of the world, but Australian producer prices are rising, and have been trending higher since the third quarter of last year.

At the same time, it looks like the Australian economy may have bottomed, as consumer confidence is rising from cycle lows and as real wages continue to grow.

He now expects two quarter-point increases, in August and November. That's more aggressive than market expectations, which implies roughly a 50% chance of one hike, by September.

Two increases would take the RBA's cash rate to 4.85%, where it would stay. And here's where Trump comes in. Rabobank doesn't expect the U.S. fed funds rate to go below 4.5% because of the possibility that Trump will enact inflationary tariffs.

So if U.S. rates are higher, Australia's will have to be as well to make sure the Australian dollar (AUDUSD) doesn't depreciate and trigger imported inflation.

He references Penelope Smith, the head of the international department of the Reserve Bank of Australia, who was asked last year about Australian rates being higher than the U.S. and Europe for most of the last 40 years. "I don't think that relationship with the kind of rates in the U.S. is going to change any time soon," she said.

Picton also, unusually, charted house prices in Sydney - in terms of gold (GC00). Drawing on former Fed chair Alan Greenspan's reverence for gold prices, it shows that Sydney home prices in hard money haven't changed much in the last 15 years. His point is that CPI data has not adequately quantified real inflation since the currency has been debased.

Running a similar analysis for the U.S., and the price of a house is some 70% below its peak, and also hasn't moved much in the last 15 years.

-Steve Goldstein

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05-01-24 1030ET

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