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RBA hikes rates by 25bp, as expected, but is a touch less−hawkish in the statement

Tue, Nov 3 2009, 08:14 GMT
by Saxo Bank Strategy Team

Saxo Bank

AUD eases after announcement, pulling other currencies off highs in a quiet Asia

MAJOR HEADLINES – PREVIOUS SESSION

• US Oct. ISM Manufacturing out at 55.7 vs. 53.0 expected and 52.6 prior

• US Oct. ISM Prices Paid out at 65.0 vs. 64.0 expected and 63.5 prior

• US Sep. Construction Spending out at +0.8% m/m vs. -0.2% expected and revised -0.1% prior

• Us Sep. Pending Home Sales out at +6.1% m/m vs. flat expected and +6.4% prior

• NZ Q3 Private Wages out at +0.4% vs. +0.3% expected and +0.3% prior 

• NZ Q3 Avg. Hourly Earnings out at +1.7% q/q vs. +0.5% expected and +0.7% prior

• NZ ANZ Oct. Commodity Prices out at +4.6% vs. +6.8% prior

•  AU RBA Hikes Cash Target Rate to 3.5% from 3.25%

THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• UK PMI Construction (0930)

• EU European Commission Economic Growth Forecasts (0945)

• EU ECB’s Mersch and Weber to speak (1400)

• US Factory Orders (1500)

Market Comments:

The economic data overnight impressed and there was a general attempt to put risk back onto books, though this proved to be not particularly convincing with a number of clouds helping to cap the euphoria. While the PMI data in Europe was either in line or above forecast, the US ISM manufacturing report was very strong, hitting 55.7 vs. 53.0 expected with a good improvement in the employment component (highest since April 2006) but showed a drop in new orders for the second consecutive month. This provided a kneejerk reaction higher in risk assets but later developments saw risk appetite gradually running out of steam. For the record, pending home sales were also firmer (+6.1% vs. flat consensus) and construction spending rose 0.8% vs. an expected 0.2% contraction though these numbers played second fiddle to the ISM.

The gloomy weekend comments from respected investors Wilbur Ross and George Soros were resurrected by a Fed official in the Banking Supervision and Regulation department who said US banks were at risk of sizeable new loan losses, particularly on commercial property, and some banks may not have sufficient capital to ride out such a scenario. This put a dampener on the financial sector and pulled Wall St off its highs and dragged the dollar back to levels seen at the open.

The major event for Asia (apart from the Melbourne Cup!) was of course the RBA rate announcement. The Australian central bank kept to the market’s script by hiking rates 25bp to 3.50%, marking the second successive month of rate hikes. However, there were mildly dovish (or less-hawkish) undertones in the accompanying statement in particular noting that “some spending has been brought forward due to the various policy initiatives. With those effects now diminishing, these areas of demand may soften somewhat”. On growth the RBA said it was likely to be close to trend over the year ahead and the past 2 rate hikes would work to increase the sustainability of growth in economic activity and keep inflation with target over the years ahead. Generally, this was interpreted as an indication of a possible pause at the next meeting and a more gradual - 25bp a time – series of hikes. The yield curve was priced a tad more aggressively and we saw AUD bond yields dipping around 10bp and the AUD settled near the low 0.90s.

Apart from the AUD excitement, it was a quiet session in Asia with the Tokyo holiday for Culture Day taking away the trading edge. Other majors were marginally affected by the AUD’s slide but still held within established ranges.

It is a slow day on the data front today with UK construction PMI data on tap while the European Commission releases its economic growth forecasts during the European session. US factory orders is the only data released in the US session but note the 2-day FOMC meeting starts today. The market’s attention recently has been on whether the Fed will tone down the language in its commitment to keep rates low “for an extended period” and the market still seems evenly split whether this will be the case or not.

Published on  Tue, Nov 3 2009, 08:31 GMT