The foreshadowed cut to the Reserve Bank's rate cut next Tuesday isn't occurring in isolation. Around the world bond yields are tumbling and stock markets sliding.
The RBA governor Philip Lowe gave a clear signal last week that the cash rate would be cut from 1.5 per cent to 1.25 per cent, setting another historic low.
In the local bond market, however, the yields on two and five-year securities are already lower, at 1.14 per cent and 1.2 per cent respectively. Both have fallen more than a percentage point in the past 12 months, as has the 10-year rate, down 116 basis points to 1.52 per cent.
While the RBA's much-anticipated cut reflects, to a degree, domestic circumstances - a slowing economy, the edging up in the unemployment rate, the sharp fall in house prices - it is also driven by what's happening overseas. External developments are threatening to overwhelm the domestic settings.
In the US, the yield curve has inverted, with short-term rates higher than long-term rates. Investors are prepared to accept a lower yield (2.26 per cent) for bonds that won't mature for a decade than they are for bonds maturing in three months (2.35 per cent).
Every US recession has been preceded by an inversion of the yield curve, although not every inversion has been followed by a recession. What the US bond market is signalling, however, is lower rates in future because of an expectation that the rate of growth in the US economy will slow.
In Europe, German bunds are trading at negative yields, with the 10-year bund yielding minus 0.181 per cent. In Japan the 10-year rate is minus 0.10 per cent.
Stock markets are also retreating. The US market, while still at historically high levels, has fallen about 5.5 per cent this month. Europe's Stoxx index is down more than 6 per cent. The UK's FTSE 100 is down 3.4 per cent.
Our market has so far defied the trend, helped by the surge in iron ore prices after the latest Brazilian dam disaster, something of a relief rally in the major bank stocks and the re-election of the Morrison government, and has held its ground this month.
Global markets are interconnected, with capital flowing to and from assets and asset classes that are regarded as higher-returning when risks appetites are "on'' and out of them into the perceived safe havens of bond markets, particularly the US market, when the appetite for risk is "off".
Bond yields have an inverse relationship with bond prices - as prices rise yields fall. The tumbling yields around the globe reflect a perceived riskier environment as investors' funds flow into bonds and push their prices up.
It's not hard to determine why equity and bond investors think the world has become riskier this month.
At the start of the month the US and China appeared to be on the verge of agreeing a trade deal that would avert the threat of a full-blown trade war.
Then, even as China's delegation was about to fly to the US to finalise the deal, the negotiations broke down and the Trump administration raised the tariffs on $US200 billion of China's exports to the US from 10 per cent to 25 per cent and threatened to impose tariffs on the remaining $US325 billion of China's exports to the US.
As if that weren't sufficient to unsettle the markets, the US announced a ban on US companies supplying China's telecommunications giant Huawei, with China responding by threatening to cut off the supply of rare earths - used in everything from washing machines and vacuum cleaners to military jets and missiles - to the US. China dominates rare earths production.
Throw in the US escalation of tensions with Iran, the political turmoil in the UK as a hard Brexit looms and the prospect that the US will initiate another trade war later this year, this time with Europe, and it is little wonder markets have become nervous.
The US confrontation with China, which has escalated from a trade dispute to a clash of competing economic systems and philosophies, and an attempt by the US to throttle a challenger to its economic and geopolitical supremacy, will lower global growth.
It will hurt China more than the US but both will be adversely impacted, as will the rest of the world if growth rates in the world's two largest economies slow. The, third, the eurozone bloc, is already flat-lining.
Given the context, it is hardly surprising US bond rates have fallen to two and a half-year lows, German bunds to two-year lows, our bonds to record lows and the discussion in markets is not whether central banks will cut their policy rates but how many reductions there might be.
If the confrontation between the US and China continues to intensify, the global economy slows and China (whose growth shielded us from the global financial crisis) slows more than most, the RBA may have no option but to lower rates further, and perhaps even adopt the kind of unconventional monetary policies that the US and Europe resorted to in response to the global financial crisis.
- SMH/The Age