April 21, 2015

Markets Today: Door to lower rates still wide open

Glenn Stevens spoke last night, and some of his words clearly resonated in FX market if less so in interest rate markets.

Glenn Stevens spoke last night, and some of his words clearly resonated in FX market if less so in interest rate markets. Newswire headlines screaming ‘Question of interest rate cuts has to be on the table’ and ‘Aussie dollar will very likely fall further’ had an immediate impact on the currency, AUD/USD losing almost exactly half a cent in a matter of minutes.  This represents an almost complete reversal of the jump we saw in all things AUD immediately following last Thursday’s much better than expected employment report with its accompanying revisions to the February data. This had seen money markets shift their implied probability of a May 25-point cut to the Cash Rate from around 75% to just under 60%.  Overnight, Australian rates markets have moves those odds back to about 62%.

Mr Stevens comments on the currency really aren’t anything new, what is that the easing bias put in place in February alongside the cut in the Cash Rate to 2.25%, looks to be very much intact notwithstanding the apparent improvements in the labour market that now date back to even before the February RBA meeting.  That said, while Stevens has made it very clear that the door remains wide open for a further rate cut(s), it is still far from obvious that the Board will choose to walk through it again as early as May 5.

Indeed, and as our London colleagues noted in their comments on the speech, Stevens was also at pains to point out the “balance” the RBA has been seeking to strike on rates, noting the policy rate “has been held at what would have been seen as extraordinarily low levels for quite a while now.” He said, “The Board has been proceeding with a degree of caution that is appropriate in the circumstances”, noting that the RBA also has a, “realistic assessment of how much monetary policy can be expected to achieve in supporting the adjustment the economy needs to make.”

And while stating that rate should be accommodative in the context of unemployment remaining above most estimates of NAIRU (long hand for full employment, aggregate demand  on the soft side and inflation forecast to remain consistent with the 2-3% target, he went on to say these are “not the only pertinent facts”, noting that higher house prices increase perceived wealth and encourage higher construction, through higher spending on durables. Here, there is some signs of success, Stevens notes, with housing starts reaching high levels this year and an apparent knock-on to consumption, which is rising faster than incomes.  Then there are dwelling prices, noted Stevens, which at a national level have already “risen considerably” at a time when income growth has been slowing. Stevens said in his opinion too much focus has been on Sydney prices, but while too little attention is put on the more disparate trends in ‘the other 80 per cent’ of Australia, “it is hard to escape the conclusion that Sydney prices – up by a third since 2012 – look rather exuberant.” “Credit conditions are only one of several factors at work here, but credit conditions are very easy,” he said. “A balance has to be found.” So, all up still much to play for heading into May 5.

Not much else to say about overnight markets, but where stock staged something of a comeback from last Friday’s savaging, buoyed by Sunday night’s China RRR cut announcement (albeit more so in the US and Europe than China itself) and an earnings beat from Morgan Stanley.   Ongoing Greek default jitter remain very evident, and this does see the Euro lower overnight, albeit not quite as much as AUD. Fears have also been reflected in a fresh rise in Greek bond yields, with 2017 maturities hitting a fresh record high of 28%.

NY Fed President Dudley spoke last night but really just emphasised the data dependency of Fed policy, while Boston Fed President Eric Rosengren said he is “hopeful” conditions will be right sometime “this year” to lift rates – but not now.

Coming Up

Hot on the heels of Stevens’ overnight speech, today sees the RBA Board Minutes, the second month when the RBA again left rates on hold.  We now have to wonder if they will offer that much fresh insight given what we’ve just heard from the Governor.

We’ll be looking for any signs in the Minutes that might hint whether the RBA thinks that the economy is tracking in line with its forecasts prepared in the lead up to the February rate cut.  In the March Minutes, the Bank noted that their decision to wait reflected that “members saw benefit in allowing some time for the structure of interest rates and the economy to adjust to the earlier change. They also saw advantages in receiving more data to indicate whether or not the economy was on the previously forecast path”.  A restatement along similar lines or even some clarification of how the economy is tracking relative to the earlier forecast will provide useful guidance.

We’ll also get NAB’s quarterly residential property survey this morning (one point of interest in which will be the latest estimates for the overseas investor component of housing demand).  Offshore tonight we get the German ZEW survey.


On global stock markets, the S&P 500 was +0.90%. Bond markets saw US 10-years +1.65bp to 1.88%. On commodity markets, Brent crude oil -0.06% to $63.41, gold-0.8% to $1,194, iron ore  +1.3% to $51.57. AUD is at 0.7724 and the range was 0.7707 to 0.7843.Indicative range today 0.7690 – 0.7765. (For more market prices, please see p.2 of the pdf).

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