The revelation that the underlying CPI was not another repeat of the first quarter when growth was an anaemic 0.2% but pushed up this quarter to 0.5% had the market rethinking and repricing whether the RBA was indeed more likely than not to cut rates again next week. The 30 day RBA futures curve this morning is pricing near 50-50 split with some economists changing their call to no change in August. NAB’s assessment is that the CPI was right in line with RBA May SoMP forecasts and likely sufficient to see them remain on hold next week. Peter Martin in the SMH though says the RBA is on standby to cut rates on Tuesday. An article in the AFR overnight from former RBA Board member Warwick McKibbin has warned against following “market hysteria” for a rate cut, arguing that in a low nominal growth world it’s better to use fiscal policy.

It was not quite the up session for the AUD yesterday that might have been expected after an OK underlying inflation read. It did briefly spiked up toward the 7560 level only to recede back to the figure and below, held back in the afternoon by some strengthening in the yen (lower USD/JPY), wire stories suggesting the Japanese government was considering issuing 50 year JGBs.  Stories emerged the Japanese government was going to announce the stimulus plan yesterday afternoon but that was further delayed until an expected announcement now next Tuesday. There is talk the stimulus could be a sizeable ¥27tr though no details are as yet forthcoming and how much of this sizeable package is new money remains to be seen.  The USD/JPY remains at the lower end of its range from the past 24 hours this morning, the market awaiting the detail next week.

The FOMC announced no change in the fed funds rate as expected and with no overt smoking gun that a September rise is in the offing. This saw some selling in the US dollar with compensating rises in the majors and extended a rally in US Treasuries that was already underway, the market this morning still pricing in barely a 50% chance that the Fed will hike rates before the end of this year. There has been a modest rally at the front end of the fed funds curve.

While there was no smoking gun as far as a hike in September is concerned, the statement is essentially a “holding” one, and keeps the door ajar to a September hike should the data between now and then strongly suggest that’s the right course of action.  The Fed in the end will be data dependent; the statement noted that near-term risks to the economic outlook “have diminished” while also tweaking the statement to recognise the strong pick up in jobs in, strong household spending, but also that business investment has been soft. We also note here that durable goods orders for June published overnight was another soft one, shy of expectations, with the Atlanta Fed’s GDPNow estimate for Q2 shaved as a result from 2.4% 2.3%.

Coming up

After the CPI yesterday, it’s very quiet on the data front today with only export and import merchandise trade prices for the September quarter, an early reading to the terms of trade for the September quarter. Markets are expecting a small rise in this measure of the terms of trade; NAB looks for small pullback. Either way, it’s unlikely to have much if any market fallout. UK nationwide house prices are also due today, this afternoon at 4 PM these for July market looking for flat house prices in the month.

For tonight’s data set, there is the July German unemployment report expected to reveal an unchanged unemployment rate at 6.1%, then the July German CPI along with the July confidence indicators for the Eurozone. The key business climate indicator is expected to pull back slightly from 0.22 to 0.17. In the US there is the advance goods trade balance for June that will allow some further tweaking of likely Q2 GDP out tomorrow night. Is also the weekly jobless claims.

Overnight

On global stock markets, the S&P 500 was -0.12%. Bond markets saw US 10-years -6.35bp to 1.50%. In commodities, Brent crude oil -3.16% to $43.45, gold+1.5% to $1,348, iron ore +0.9% to $58.63. AUD is at 0.7493 and the range since yesterday 5pm Sydney time is 0.7427 to 0.7498.

Good luck.

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•  Markets Today:  28 July 2016 (PDF, 123kb)

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