Down Under, in quite a surprise
The RBA did analyze
Inflation of late
And then couldn’t wait
To raise rates to multi-year highs
Explaining inflation’s been hot
The Governor and his team thought
If we don’t act now
We may well endow
The idea, our goal, we forgot
You know it is a dull day when the biggest news in the market is that the RBA surprised markets and raised their base rates by 25bps last night, taking the level to 4.10% and implying in their accompanying statement that more hikes were still on the table. The money line from Governor Lowe was as follows, “The board remains alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the still very low rate or unemployment.” That does not sound like a central bank that has finished their hiking efforts and the market is now pricing a 50% probability of another rate hike by August. It should be no surprise that the Aussie dollar (+0.6%) is the leading performer in the FX markets today, especially given that the dollar remains well bid overall.
In China, the PBOC
Has lately begun to agree
That growth’s in a slump
So, it’s time to pump
It up with a rate cut or three
The other interesting news overnight was that the PBOC has asked Chinese commercial banks, notably the big five banks, to cut deposit rates to their clients by 5bps in order to help encourage more spending, and correspondingly more growth. Clearly, all is not well in the Middle Kingdom with respect to the economic situation although it is very interesting that the PBOC is not adjusting rates themselves. Now, the big five state-owned banks are a critical part of Chinese monetary policy transmission, so a PBOC rate cut would feed through those institutions anyway, but I believe this is more theater in an effort to separate the government’s actions from direct support for the economy. In the end, it’s all the same, as the Chinese rebound is very clearly under pressure. One of the key drags remains the property sector and it is just not clear how the Chinese are going to solve that problem. As of yet, like every government, they have simply kicked the can down the road a bit. As to the renminbi, it continues to trade on the soft side, with the dollar above 7.10, although it is certainly not collapsing.
However, after these two stories, there has been a dearth of news to drive things with just some desultory Factory Orders data from Germany (-0.4% M/M, -9.9% Y/Y) helping to remind everyone that the German economy, and by extension the Eurozone, has many issues yet to overcome after the loss of their cheap Russian energy. So, let’s take a quick tour of markets and call it a day.
Yesterday’s big announcement from Apple regarding their new headset was less than scintillating to the trading community and we saw US equity indices slip a bit. Overnight, while the Nikkei (+0.9%) managed a rally, the rest of the space generally fell and Europe, this morning is all in the red as well, albeit only on the order of -0.2%. In fact, that -0.2% describes the US futures markets at this hour (7:30) too.
Bond yields have edged a bit lower on this modest risk off session with Treasuries (-1.1bps) consolidating their recent losses (yield gains) while European sovereigns have seen more demand with yields there lower by about -4bps across the board. We haven’t touched on JGBs lately because there has been absolutely nothing happening in that market with the 10yr trading at 0.42%, still well below the YCC cap, and showing no pressure higher of note.
The one place where we have seen real movement this morning is commodity prices with oil (-2.2%) giving up almost all its post Saudi production cut gains. The commodity market continues to be the leading proponent of a recession as can be seen in the base metals as well with both copper and aluminum under pressure today. Meanwhile, gold (+0.1%) continues to hold its own despite pretty consistent dollar strength, definitely an unusual outcome and perhaps a commentary on general risk attitudes being heightened.
As to the dollar, it should be no surprise that NOK (-0.6%) is the G10 laggard given oil’s declines, but other than that and AUD’s gains, the rest of the G10 is split with modest gains and losses, although the euro (-0.2%) seems to be feeling a little heat from those lousy German numbers. In the EMG space, though, there is a lot more dollar buying evident with both APAC and EMEA currencies under pressure. Part of this movement seems to be related to some softer CPI prints encouraging the belief that interest rate rises are less likely, and part of this seems to be a bit of risk-off sentiment.
And that’s all there is today. There is no US data to be released and, of course, the Fed is in their quiet period ahead of next week’s FOMC meeting. As such, when it comes to the dollar, I expect that its recent underlying strength will remain barring a complete reversal in risk sentiment.