US and European equities ignored the negative lead from Asian markets and started the month of May on a positive note. While yesterday’s fall in the Nikkei, partly reflected a catch up move given Friday’s  holiday in Japan, this negative sentiment spread throughout Asia with all markets excluding Thailand posting small decline for the day.

Gains in US stocks were led by consumer discretionary shares with the softer than expected manufacturing data seemingly having no dampening effect. The April ISM manufacturing index fell to 50.8 from 51.8 compared to 51.4 expected.

The softer manufacturing data apparently had a bigger effect on the currency with the USD softer across the board. The SEK and the AUD are the G10 top performers over the past 24hrs. After trading to a low of 0.7593, the AUD/USD is now trading at 0.7669 and is up 0.76% since Monday’s open. In a broad soft USD environment, the move higher in the AUD is probably also a reflection of short positions squaring up ahead of the RBA this afternoon. While admittedly a move sub 2% is very much a ball line call, NAB’s view is that last week’s extremely low CPI prints provides the RBA with the opportunity to add more support to the non-mining recovery without risking an overshoot in the Bank’s inflation target. Like NAB, we think the Governor remains pretty chilled and optimistic on the near term outlook for the economy, however given the prospect core inflation will run below the RBA’s target range at least over the near term, the Bank has room and the incentive to provide further stimulus (see more comments below)

Looking at other currencies, the EUR is trading above 1.15 for the first time since August, USDJPY is practically unchanged at ¥106.43 and the NZD/USD is back above 0.70.

In a light trading environment, US bond yields pushed higher overnight. The prices paid component in the ISM manufacturing index rose to 59 from 51.5 in March and although the move higher in yield was already under way, the jump in the price index was an additional driver for the move higher in yields.

Despite of a softer USD, oil prices fell overnight following a data release showing US oil stockpiles rose last week while a Reuter’s survey suggested OPEC’s output rose in April. Looking at other commodities, Iron ore is back above the $66 mark (+5.5%), Gold is practically unchanged at $1292.9 and copper is up 2.2%.

Coming Up

We have a massive day domestically with the RBA board meeting this afternoon followed by the Federal budget this evening.

Last week’s CPI print saw the AUD/USD drop two big figures on the day (0.7765 to 0.7549) and the probability of a May rate cut jumped from a 14% to 51%. Based on last night’s closing levels this probability is practically unchanged at 52% while Bloomberg’s survey shows 55% of respondents expect the RBA to stand pat (15 out of 27).

The reaction to the CPI print along with the almost evenly split view on the RBA rate decision today suggest a result either way has the potential to elicit big moves in both the AUD and rates market. That said, we suspect that in the event of a hold decision the rally in the AUD is likely to be limited given that the market will most likely retain pricing of a rate cut over the near term.  In contrast, if the RBA cuts, as we expect, the extent to which the Bank retains its easing bias will determine the degree of the selloff in the currency.

As for the budget, NAB expects the Treasurer will unveil a 2016-17 Underlying Cash Balance (UCB) of around $A-36.6bn (2.1% of GDP), up somewhat from the $A33.7bn shortfall released in the Mid-Year Economic and Fiscal Outlook (MYEFO) and fairly close to the market consensus $A35bn deficit. History suggests Federal budgets do not usually trigger a big market reaction from markets. That being said, comments from rating agencies are likely to be closely watched, particularly given last month’s low level warning on Australia’s AAA rating from Moody’s.

Ahead of the two big domestic events this morning we also get the weekly consumer confidence reading (9:30am) followed by building approvals at 11:30am. Of some interest as well, China’s Caixin version of its manufacturing PMI is due for release at 11.45am. The small fall recorded in the official manufacturing reading over the weekend suggests there is downside risk to the practically unchanged number expected by the market (49.8 vs 49.7 prev).

In other offshore markets, the UK gets its manufacturing PMI reading for April (51.2 exp vs 51 prev) and in the US the New York April ISM is due for release. As for Fed speaker, Mester (non-voter) moderates a panel on Financial Markets, Williams (non-voter) speaks with Bloomberg radio and Lockhart (non-voter) speaks to World Affairs Council in Jacksonville.

Overnight

On global stock markets, the S&P 500 was +0.80%. Bond markets saw US 10-years +3.90bp to 1.87%. On commodity markets, Brent crude oil -3.00% to $45.95, gold+0.4% to $1,296, iron ore +5.3% to $66.24. AUD is at 0.7668 and the range was 0.7663 to 0.7669.

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• Markets Today: 3 May 2016 (PDF, 1MB)

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