RBA leaves rates unchanged, gives a more upbeat outlook on economy but reiterates more scope for cuts


MAJOR HEADLINES – PREVIOUS SESSION

  • UK May Manufacturing PMI out at 45.4 vs. 44.0 expected and revised 43.1 prior

  • CA Q1 GDP out at -5.4% y/y vs. -6.6% expected and revised -3.7% prior

  • US Apr. Personal Income out at +0.5% vs. -0.2% expected and revised -0.2% prior

  • US Apr. Personal Spending out at -0.1% vs. -0.2% expected and revised -0.3% prior

  • US Apr. PCE Deflator out at +0.4% y/y, as expected, vs. +0.6% prior

  • US May ISM Manufacturing Survey out at 42.8 vs. 42.3 expected and 40.1 prior

  • US Apr. Construction Spending out at +0.8% m/m vs. -1.5% expected and revised +0.4% prior

  • AU Q1 Current Account Balance out at –A$4.6 bln vs. –A$5.4 bln expected and revised –A$6.4 bln prior

  • AU Apr. Building Approvals out at +5.1% m/m vs. +2.0% expected and +3.5% prior

  • AU RBA leaves interest rates unchanged at 3.0%, as expected


THEMES TO WATCH – UPCOMING SESSION

  • Swiss Q1 GDP (0545)

  • Denmark Retail sales (0730)

  • Swiss Manufacturing PMI (0730)

  • UK Consumer Credit (0830)

  • UK M4 Money Supply/Lending (0830)

  • UK Mortgage Approvals/Lending (0830)

  • EU Euro-zone Unemployment (0900)

  • US Pending Home Sales (1400)

  • US Fed’s Fisher speaks (1720)

Market Comment:

European data releases yesterday continued to paint a mildly upbeat picture with May final Euro-zone manufacturing PMI rising to 40.7 from 36.8, revised up from the original flash number at 40.5. This marked the highest reading since October 2008. In addition, UK manufacturing PMI also rose for the fifth time in the past 6 months, hitting 45.4 in May and above consensus 44.0.

Similar surveys in the US were even more upbeat as the May ISM manufacturing index came in at an 8-month high of 42.8 (vs. an expected 42.3). More encouragingly the new orders component of the index rose into expansionary territory (above 50) for the first time since November 2007, hitting 51.1. US personal consumption contracted 0.1% but was not as bad as the 0.2% feared by the markets while personal incomes posted a 0.5% gain (vs. -0.2% expected). In addition construction was also on the up, rising by 0.8% (consensus was for a 1.6% decline) with gains in both the residential and non-residential sectors.

The more optimistic data fueled an extension of the good mood on Wall St, with the S&P closing above the 200-day MA for the first time since November and at a 7-month high close. Relief was also evident once GM filed for bankruptcy as expected and its fate became more clear. However, GM was dropped from the DJIA along with Citigroup and were replaced by Cisco Systems and Travelers respectively.

US bonds had a jittery session and the yield curve steepened amid talk of heavy mortgage-related hedging activity. The 10-year yield jumped 22bp to 3.68%, close to the cycle highs again. The currency pair with the highest sensitivity to interest rate differentials, USDJPY, reacted accordingly and rebounded almost 2.5% from session lows with the rebound stalling just short of the 200-day MA.

Elsewhere, the USD remained under pressure against most major currencies with the AUD and CAD solid beneficiaries as commodity prices continued to rally. However, profit-taking in the later stages pulled these currencies back from session highs. The USD also gained some traction following pro-dollar comments from a Chinese official who rejected the idea that the dollar would be replaced in the near future as the global reserve currency. Guo Shuqing, chairman of the China Construction Bank and former head of China’s FX administrator, adding that the USD remains the number one currency due to the economy’s position as number one in terms of competitiveness and innovation.

In Asia today, the major event was the RBA’s rate announcement. The antipodean central bank left rates unchanged at 3.0%, as expected, but confirmed that there was further scope for easing should it be deemed necessary, courtesy of a very benign inflation environment.

Prior to the policy meeting, data releases were again on the positive side, with building approvals rising for the third month in a row, up 5.1% m/m in April, while the Q1 current account deficit narrowed to 3.1% of GDP at A$4.614 bln versus last year’s peak of 6.5%. With a housing sector that looks to be in recovery mode, and news that net exports are expected to contribute 2.2% to Q1 GDP, one could suggest that Australia may avoid sliding into technical recession when the data is released tomorrow. However, the fly in the ointment remains the job situation and retail sales data that has yet to confirm a recovering trend. Yet overall, a generally positive mood for the AUD should emerge.

In the second day of his official visit to China, US Treasury Secretary Geithner continued to reassure Chinese leaders that the huge US budget deficits were temporary and would be slashed once the recovery got under way. In addition, the exceptional measures taken to shore up the financial sector would be reversed. He reported that the response from China had been positive, with confidence expressed in the strength, resilience and dynamism of the US economy.