Markets Today: RBA, far from business as usual

RBA surprises (most) for second month running with 50bps Cash Rate rise to 0.85%

By Ray Attrill

Todays podcast

https://soundcloud.com/user-291029717/rba-far-from-business-as-usual?in=user-291029717/sets/the-morning-call&utm_source=clipboard&utm_medium=text&utm_campaign=social_sharing

Overview Surprise Surprise

RBA surprises (most) for second month running with 50bps Cash Rate rise to 0.85%
AUD falls while rates market lifts terminal Cash Rate pricing to above 3.75% – discuss!
US 10-year Treasuries slip back to 3.0%, helping US equities up, USD down slightly
Lull in the data/events calendar now ahead of ECB Thursday, CPI Friday

Surprise surprise, surprise surprise, You’re much better looking when you’re in disguise – Billy Talent

US equities have staged a decent intra-day turnaround to see the S&P500 finish 0.9% higher, aided in part by a fall-back in US longer dated Treasury yields where 10s are back (just) below 3.0%, in turn seeing the USD slightly softer. AUD has recovered its mojo after falling below pre-RBA rate rise levels during our time zone, to be the best performing G10 currency in the last 24 hours. Markets now await the ECB Thursday and US CPI Friday for its next big directional clues.

Yesterday the RBA surprised most in the market, whether traders or market economists, and for a second meeting in succession, with its 50bps lift to the Cash Rate to 0.85% , in doing so welcoming itself to the now ‘gang of four’ G10 central banks who have determined that 50 is the new 25, after the RBNZ, Bank of Canada and US Federal Reserve before it. In doing so, it cited inflation now seen higher than they expected just a month ago, with pressure coming not just from global forces but also domestic influences , including higher gas and electricity prices as well as (more tellingly) tight labour markets and therefore an implied expectation that wages are in process of rising more sharply than officially published statistics would yet have you believe.

Markets have been quick to assume that there is likely another 50bps Cash Rate rise in July where the June one came from, and quite possibly same again in August (which will, of course, be a meeting that comes soon after the Q2 CPI release). NAB wll update its RBA forecast track later today.

In terms of market reaction, money markets sold off across the rates curve to see the implied terminal Cash Rate lift by about a quarter of a percent to just above 3.75% from near 3.5% going into the RBA. Its possible market positioning and a resulting forced liquidation was as much responsible for the moves here as a considered view that rates were now likely to rise by more than previously expected. Let’s see if that is the case in coming days. Of interest here was that in the FX market the AUD, having initially jumped on the +0.5% headlines, gave back all of its knee-jerk gains and then some in the following couple of hours. Here, one train of logic was that with the RBA now revealing its preference to get rates back up to something approximating neutral much sooner than previously believed likely, then perhaps the terminal Cash Rate might not now end up having to be as high as previously thought. On the basis, one of either the currency or rates market is wrong!

Gains for the AUD post Tuesday’s APAC day close owe something to a softening in the USD where the Bloomberg BBDXY index is finishing in New York about 0.2% down on Monday’s close. AUD is nevertheless the next performing G10 currency in the past 24 hours with a gain of 0.6% to a high of 0.7246 (pretty much matching the high seen immediately after the RBA announcement). The AUD/NZD cross meanwhile held on to its knee jerk gains and at 111.43 is at its best level since August 9, 2018. A narrowing in NZ-AU rate spreads now joins relative Ausrlain commodity price strength in supporting the pair. In regard to the latter, latest NZ dairy prices overnight showed a1.5% gain in the GDT index but which was slightly on the disappointing side of expectations.

After AUD, GBP is the next best performing G10 currency, up just under 0.5% against the USD. This after UK PM Johnson survived yesterday’s no confidence vote, but a relatively slender 211-148 margin (less than that which former PM Theresa May achieved just a few months prior to being ousted). The current burning question in Westminster is, ‘Who is capable of taking over from Johnson?’

Helping bring the USD down has been the fall-back in US Treasury yields , with 10s ending New York at 2.98% versus a high of 3.06% in Tokyo yesterday. Equites on the back foot during the US morning might have ben a factor here, though the late-day recovery in the latter, that sees the S&P500 and NASDAQ both finish just shy of 1% higher, gives the lie to this. Slightly lower yields has brought USD/JPY down to around Y132.50 from a (very technically overbought) Y133.0.

Not much by way of data since the local market close Tuesday, though to note were that: 1) German factory orders fell by a much bigger than expected 2.7% in April (0.4% consensus) and which we would suggest reflects earlier weakness in China PMIs, particularly the import series and which typically shows up in weaker European/US PMIs with a 2-3 month lag (US beware!); 2) Canada’s May Ivey PMI printed a very strong 72.0 up from 66.3; and 3) The US trade deficit shrank to $87.0bn in April from 109.8bn in March, a little more than expected and implying net trade has started Q2 as a net positive for GDP following the Q1 fall.

Finally, US Treasury Secretary Janet Yellen has been speaking to Congress, where she laments her and Jay Powell’s use of the term ‘transitory’ to describe US inflation and suggests that Congress could contribute to reducing it via reducing drug prices together with supply side reforms including improved access to affordable housing and investment in renewable energy.

Coming Up

A lull in the calendar now before the ECB on Thursday and US CPI on Friday.
Japan has its final Q1 GDP, seen revised to -0.3% from -0.2% QoQ (Q2 is already shaping up better)
Nothing due out of the US tonight, while Europe has German April industrial production, which will likely come in below the -2.4% consensus after much weaker than expected Factory Orders yesterday (latter -2.7% against +0.4% expected led by a 4% drop in foreign orders, reflective of earlier significant weakness in China’s import PMI). Also final EZ Q1 GDO, seen unchanged at 0.3%
The OECD publishes its latest Economic Outlook, presumably to contain a swathe if upward revised inflation forecasts