Last week saw the critical release of Australia’s inflation figures for the second quarter of 2016. The Consumer Price Index (the primary inflation measure) rose by 0.4% quarter-on-quarter which resulted in an annual inflation rate being 1.0% (a 17-year low). Average underlying inflation was down to 1.5% the lowest in the entire 20-year series. The lower import and producer prices suggest this trend will continue and the probability of further economic deterioration is likely. Inflation is now tracking well below the RBA’s 2-3% target range and all indications suggest more RBA rate cuts ahead.   Futures markets are pricing in a 60-70% probability of a rate cut from the RBA at this weeks meeting. It is our expectation that a potential rate cut tomorrow could be the consequence of an appreciating AUD rather than any specific economic data. However, the low inflation reading could be the straw that broke the camels back.   In the US the FOMC statement disappointed those looking for a clear path to higher interest rates suggesting that a stronger economy is evident but they are holding back on suggestions of a hike at the next meeting.   The domestic yield curve is flat and overall yields across the curve are low compared to long term averages. In November 2015 there was a progressive increase in yield from ~2.60% to a high of 2.99%. But since this time the flight to quality meant the 10-year yield gave back the changes in Q4 2015 and more recently the Australian Government 10-Year Bond Yield has continued to drop to record lows (new low of 1.864% as at 6 July 2016). The 3-year bond has followed a similar pattern and broke out of its yield range (1.90 – 2.10%) in November / December 2015 reaching a high of 2.18%. It has since collapsed to reach a low of 1.46% on the 26th of June 2016. On the 29th of July 2016 the ASX 30 Day Interbank Cash Rate Futures June 2016 contract was trading at 98.400 indicating a 64% expectation of an interest rate decrease to 1.50% at the next RBA Board meeting (down from 70% last week).