RBA rate meeting outcome as expected; no change in rates, shift to more neutral bias


MAJOR HEADLINES – PREVIOUS SESSION

  • US Jul. ISM Manufacturing out at 49.8 vs. 46.5 expected and 44.8 prior

  • US Jul. ISM Prices Paid out at 55.0 vs. 52.0 expected

  • US Jun. Construction Spending out at +0.3% m/m vs. -0.5% expected and -0.8% prior

  • US Jul. Domestic Vehicle Sales out at 8.4 mln vs. 7.4 mln expected and 7.2 mln prior

  • NZ Q2 Private Wages out at +0.3% q/q vs. +0.5% expected and +0.6% prior

  • NZ Q2 Avg. Hourly Earnings out at +0.7% q/q vs. +0.8% expected and +1.1% prior

  • AU Jun. Retail Sales out at -1.4% m/m vs. +0.5% expected and +1.0% prior

  • AU Q2 House Price Index out at +4.2% q/q vs. +2.0% expected and revised -1.5% prior

  • NZ ANZ Jul. Commodity Price out at +1.0% vs. +0.2% prior

  • AU RBA leaves rates unchanged, drops scope for further monetary easing from statement


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • Swiss CPI (0715)

  • UK PMI Construction (0830)

  • EU Euro-zone PPI (0900)

  • US Personal Income/Spending (1230)

  • US PCE Deflator (1230)

  • US Fed’s Tarullo testifies (1300)

  • US Pending Home Sales (1400)

  • US ABC Consumer Confidence (2100)

Market Comments:

PMI readings across the board continued to indicate a healthy recovery in the global economy in July. The corresponding rally in equity markets brought the familiar currency correlation back into focus (i.e. the USD and JPY get trashed while the commodity-bloc currencies benefit) and this saw the USD index slide to its lowest levels since September 2008 as the S&P500 mounted the 1,000 mark for the first time since November. Whether we wish to label the latest move as “irrational exuberance” of the beginning of a new era it looks like Friday and the US non-farm payroll data may hold the key.

In the meantime, Asia was willing to push the risk appetite theme further and market headlines for currencies were dominated by phrases containing 7-month, 9-month and 10-month highs. GBP continued its record breaking run and touched the psychological 1.70 handle thereby knocking out options barriers but was back lower soon after.

Australia and the AUD featured heavily in the Asian session as well. Ahead of the much-awaited RBA rate announcement, economic data proved to be a tad mixed but the market latched on to the more positive aspects. First off, retail sales for June were a very disappointing -1.4% m/m following a solid 1.0% m/m gain in May. On quarter-by-quarter comparisons, sales were a more respectable +2.0% from +1.0% the previous quarter. It may be suggested that the monthly decline is a good indication of how temporary and short-term the effects of stimulus packages might be. Nevertheless, traders only took the AUD down 10 ticks despite the weak headlines as house price data was released next. These astounded to the upside, rising 4.2% q/q versus and expected 2.0% gain and a revised 1.5% fall the previous quarter. AUD was chased higher but stalled short of the psychological 0.85 mark as we waited for the central bank announcement.

The decision conformed to what the market was expecting – no change in rates but mention of scope for further monetary easing was removed from the statement. The RBA remained upbeat about the global economy, noting a strong performance from China though conditions in Europe were still weakening (was that the reason why EUR dipped back below 1.44?) but the US was showing signs of stabilising. It also deemed the current accommodative setting as appropriate. The reaction in currency markets was notably muted. In the end we are finishing lower than before the announcement, likely a case of the market too much positioned in one direction. How far is a shakeout likely to go? 0.84 looks an obvious target but below would seriously undermine the recent bullish trend.

After yesterday’s dynamic data releases, markets may be set for a more mundane reaction to today’s releases. US personal income/expenditure, PCE data and pending home sales are on tap. In Europe, it’s possibly the turn of UK construction PMI to surprise. EU PPI and Swiss CPI the other events in Europe.