Talk escalating that the RBA may surprise with a rate hike at tomorrow’s meeting; AUD better bid


MAJOR HEADLINES – PREVIOUS SESSION

  • US Sep. Non-farm Payrolls out at -263k vs. -175k expected and -201k prior

  • US Sep. Unemployment Rate out at 9.8%, as expected, vs. 9.7% prior

  • US Avg. Hourly Earnings out at +0.1% m/m, +2.5% y/y, vs. +0.2%/+2.6% expected and +0.4%/+2.6% prior

  • US Aug Factory Orders out at -0.8% vs. flat expected and +1.4% prior

  • AU Sep. AiG Performance of Service Index out at 49.3 vs. 48.0 prior

  • AU Sep. ANZ Job Advertisements out at +4.4% m/m vs. +4.1% prior

  • NZ Sep. ANZ Commodity Prices out at +6.8% vs. +4.1% prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • GE PMI Services (0755)

  • EU PMI Services/Composite (0800)

  • UK PMI Services (0830)

  • EU Sentix Investor Confidence (0830)

  • EU Euro-zone Retail Sales (0900)

  • US ISM Non-manufacturing (1400)

  • EU ECB’s Tumpell-Gugurell (1415)

  • US Fed’s Dudley to speak (2230)

Market Comments:

The market’s main focus on Friday was the US non-farm and employment report and overall it did not make favourable reading. The US lost a worse than expected 263k jobs in September (even though the fore-running ADP report and initial jobless claims had forced a revision of expectations lower) and the unemployment rate edged up to 9.8% from 9.7%. However, a drop in the participation rate by 0.3% suggest that, if it had held steady at August’s level, then the unemployment rate would have been above 10%. Preliminary benchmark revisions of data through to March released by the Bureau of Labour Statistics showed a sizeable downward adjustment of -824k, or -0.6%, adding to the already depressing series of data, which has seen the worst job losses in the post-war period.

Over the weekend, the G7 meeting failed to stun markets with any kind of currency rhetoric. Generally, there were the usual comments that excess volatility and disorderly movements in exchange rates were unwelcome, and had an adverse impact on economic and financial stability. They also welcomed China’s continued commitment to move to a more flexible FX rate with an implied continued appreciation of the CNY in effective terms, (note Chinese PBOC vice-governor Yi Gang said China would continue its policy setting to emphasize stability. There was no indication the chatter of the EUR’s strength (weak dollar) mentioned late last week translated into any discussion on the topic. Post-meeting comments from Japanese finance minister Fujii were perhaps more direct than before when he warned of intervention “if currencies showed some excessive moves in a biased direction”. However he declined to comment whether the recent JPY strengthening moves fell within this category.

Also at the weekend, the Irish voted “YES” by a strong 2-to-1 margin to approve the Lisbon treaty, reversing a similar referendum result last June. This result was seen as a mild positive for the EUR, and an even bigger positive for Ireland. Last year’s “NO” had made the Emerald Isle pretty unpopular in EU circles but the change in economic circumstances (and a realization of how desperate the situation really was), made the economic recovery plan more of a necessity.

Early this morning, talk and opinion in Australia escalated as to whether the RBA will hike rates as early as tomorrow’s meeting. It was noted that two respected and well-connected commentators, had chosen today to publish pieces outlining the case for a rate hike tomorrow. Interest rate futures have been sold off, and the AUD adopting a bid tone, as the possibility of a “surprise” hike is considered. Futures are currently suggesting a 40-50% chance of a rate hike tomorrow, up from last week’s 20%. Nevertheless, the current curve is currently still pricing in the certainty of a 25bp rate hike at the November meeting, but we feel we may need to get past Thursday’s unemployment data before then.

The firmness in the AUD was also reflected in the cross with its antipodean neighbor the Kiwi after New Zealand finance minister English warned in a CNBC interview that the NZ economy may be a t risk of another down-leg and specifically harped on about the currency’s strength, most notably against the AUD.

Similar comments on risks to economic recovery were also to be found coming from noted “pessimist” Nouriel Roubini. The NYU economist repeated his warning that stocks and commodities have risen too much, too far, too fast and anticipates a correction, especially once the markets realize that the recovery is neither rapid, nor v-shaped. Separately in a FT interview, HSBC’s CEO also commented that he feared a second downturn and as a result was considering delaying any plans for expansion.

The Asian session was a relatively modest affair, with most players out of Australia out for a public holiday (though stock markets were open). The general gist was that traders saw the reticent G7 as given more ammunition to the USD bears and we saw most major pairs edging up to near-term resistance levels and hovering there. Into the European session, the slew of PMI data for the services sector, Euro-zone retail sales and German investor sentiment may garner interest, but it will the US ISM non-manufacturing data tonight that will grab the spotlight.