Keep an eye on this trade signal as a guide for whether the RBA will cut interest rates

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  • Data from UBS shows the RBA has historically cuts rates when global PMI activity goes negative.
  • After rising steadily last year, PMI activity slowed in June, particularly in Hong Kong which is heavily reliant on global trade.

When activity levels in global trade go negative, it’s usually been a catalyst for Australia’s central bank to cut interest rates.

The RBA reiterated on Tuesday that it’s in no rush to raise rates, citing the risks posed to the economy from Australia’s high household debt burden.

Minutes from the bank’s July meeting also alluded to downside risks for the global economy, stemming from the recent trade war rhetoric.

In its analysis of US-China trade tensions, UBS categorised future developments in terms of either an “escalation” or a “trade war”.

In the event of an all-out trade war, tit-for-tat responses from both sides would end in the US implementing tariffs on around $US500 billion of goods — almost the entirety of its Chinese import quota.

Such a scenario would put a large clamp on the global supply chain, with negative implications for multiple asset classes.

And as a guide for how the RBA would react if global trade slows rapidly, UBS highlighted the chart below:

Keep an eye out for whether global PMIs fall below 50, because if the past is any guide then when that happens, the RBA has usually cut rates.

PMIs are seen as a key measure of activity levels in the economy. A reading above 50 signals activity levels are improving while a reading below that indicates a slowdown. The distance from 50 on either side gauges the pace of change in either direction.

The last time the reading fell to the 50 mark was in 2016, when the RBA cut rates twice.

Global PMIs rose steadily above 50 last year amid a synchronised economic upswing, but recent data readings have indicated some wobbles are appearing in the global growth story.

Data from JP Morgan showed global activity still rose in June, although it did so at the slowest pace in almost a year.

In addition, PMI data for Hong Kong — a particularly trade-reliant economy — hit a two-year low last month.

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