RBA Surprises with a 25 bp Hike

<div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj9Qlhd28dsLmVa33ekcMgQrCfeUAoG_ZY_C70RpSY9zvKGuKB7Y6liIHwYfWllIrTI_qlUDUTRfs5daeg-WqU7GkG8DaNTMmO55dgsmjxVIbuFtEEt8w9EGEHx5DQHzKQud5FJbwA-tfkrsht-fo-kIBKLSX6d9v5K-GON0l8X6IzV3orC94jp2URctg/s335/New%20paradigm.PNG"><img alt="" border="0" data-original-height="220" data-original-width="335" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj9Qlhd28dsLmVa33ekcMgQrCfeUAoG_ZY_C70RpSY9zvKGuKB7Y6liIHwYfWllIrTI_qlUDUTRfs5daeg-WqU7GkG8DaNTMmO55dgsmjxVIbuFtEEt8w9EGEHx5DQHzKQud5FJbwA-tfkrsht-fo-kIBKLSX6d9v5K-GON0l8X6IzV3orC94jp2URctg/s400/New%20paradigm.PNG" width="400" /></a></div><p><span><b><span>Overview:&nbsp;</span></b><span>The large bourses in Asia Pacific except Hong Kong eased.&nbsp; Japan and China's mainland markets are closed for the holiday.&nbsp; Europe's Stoxx 600 is up about 0.6%.&nbsp; It gapped lower yesterday and has not entered the gap today.&nbsp; US futures are a little softer.&nbsp; The 10-year Treasury nicked the 3%-mark yesterday and is just below there now.&nbsp; European benchmark yields are mostly 1-3 bp higher, but the UK Gilt yield has jumped eight basis points, and Australia’s surged 13 bp after the RBA delivered a larger than expected hike.&nbsp; The Australian dollar is the strongest of the majors, it is up about 0.70% near midday in Europe.&nbsp; The Norwegian krone and New Zealand dollar are slightly heavier.&nbsp; The other major currencies are a little firmer.&nbsp; Outside of the South African rand and Mexican peso on the upside, the Thai baht and South Korean won on the downside, most emerging market currencies are little changed.&nbsp; Gold, which two and a half weeks ago was testing $2000, found support near $1850 today.&nbsp; June WTI is quiet in a roughly $103.50-$106 range.&nbsp; US natgas is higher for a third session.&nbsp; It is up about 4.3% after rising 3.2% yesterday.&nbsp; Europe's natgas benchmark is steady after gaining 3.1% last week.&nbsp; Iron ore is off 1.5% while copper is about 1.3% higher after falling 3.2% yesterday.&nbsp; July wheat is edging higher after falling for the past four sessions.&nbsp;&nbsp;<o:p></o:p></span></span></p><p><span><span>&nbsp;</span><b><span>Asia Pacific</span></b></span></p><p><span><b><span>The Reserve Bank of Australia surprised the market by delivering a larger than expected 25 bp rate hike to kick-off the tightening cycle to 0.35%.&nbsp;</span></b><span>The market had been leaning toward a 15 bp hike.&nbsp; The central bank clearly signaled more rate hikes will be forthcoming and updated its forecasts to show inflation hitting 6% this year from 5.1% in Q1.&nbsp; It projects inflation falling back to 3% by mid-2024.&nbsp; This year's growth is put at 4.25% and 2% next year. A recent Bloomberg survey found the median forecast for this year's GDP was 4.4% and 2.8% for 2023.&nbsp; The RBA also announced it would stop reinvesting maturing proceeds of its roughly A$650 bln balance sheet.&nbsp; It reportedly has few bonds maturing next year.&nbsp; Still, the market is pricing in an aggressive tightening cycle and sees the year-end cash rate at 2.80%, rather than 2.60% discounted yesterday.&nbsp;&nbsp;<o:p></o:p></span></span></p><p><span><b><span>With Japanese markets closed for holiday, the dollar has traded quietly against the yen.&nbsp;</span></b><span>&nbsp;It has been confined to a JPY129.85-JPY130.30 range.&nbsp; It is inside yesterday's range, which was inside the pre-weekend range and remains within last Thursday's range:&nbsp; ~JPY128.35-JPY131.25. The consolidative phase may help ease Japanese angst about the pace of the move.&nbsp; Still, the price action is often associated with a continuation pattern, like a spring coiling.&nbsp;<b>&nbsp;&nbsp;Australian interest rates jumped on the surprise RBA move and the Australian dollar jumped to almost $0.7150.&nbsp;</b>&nbsp;It set a low yesterday near $0.7030.&nbsp; The Aussie stalled and a break of $0.7080 now could spur a return to the $0.7030-$0.7050 area.&nbsp; A move above $0.7200 is needed to improve the technical tone.&nbsp;&nbsp;<b>The US dollar edged higher against the offshore yuan, reaching a new high near CNH6.6980.</b>&nbsp; Recall it settled near CNY6.4040 at the end of last week.&nbsp;&nbsp;<o:p></o:p></span></span></p><p><span><b><span>Europe</span></b><span><o:p></o:p></span></span></p><p><span><b><span>The UK's April manufacturing PMI was revised to 55.8 from a preliminary reading of 55.3.&nbsp;&nbsp;</span></b><span>It stood at 55.2 in March.&nbsp; However, it was at 57.9 at the end of last year.&nbsp; The Bank of England meets Thursday and the odds of a 50 bp move instead of 25 bp stands are less than 1-in-5, according to the swaps market.&nbsp; That said, over the next four meetings through mid-September, the market has 125 bp of tightening discounted.&nbsp; This implies that the market is pricing in a 50 bp.<o:p></o:p></span></span></p><p><span><b><span>Italy's Draghi has endorsed a new spending package of 16 bln euros to help families and businesses cope with rising food and energy prices.&nbsp;</span></b><span>&nbsp;It will include a cash payment, energy subsidies, tax credits, and more funds for local governments.&nbsp; If it sounds familiar, it is because a similar plan was unveiled in February (~6 bln euros).&nbsp; The earlier plan was going to be funded by a 10% windfall tax on energy companies’ profits.&nbsp; It was expected to raise 4.4 bln euros.&nbsp; The new plan is funded by hikes that raise the tax rate to 25% and is projected to raise closer to 10 bln euros.&nbsp; Recall that GDP contracted by 0.2% in Q1.&nbsp;&nbsp;<o:p></o:p></span></span></p><p><span><b><span>The eurozone reported a larger than expected jump in March producer prices.&nbsp;</span></b><span>&nbsp;The 5.3% month-over-month surge lifts the year-over-year rate to 36.8% from 31.5%.&nbsp; Separately, the March unemployment rate stood at 6.8% after the February series was revised to 6.9% (from 6.8%).&nbsp; In March 2021, the eurozone unemployment rate was an 8.2% and before the pandemic struck, it was at 7.5%.&nbsp;&nbsp;<o:p></o:p></span></span></p><p><span><b><span>The euro is pinned near its recent lows.&nbsp;</span></b><span>&nbsp;For the fourth consecutive session, it is straddling the $1.05 level.&nbsp; For the third day, it has found some support near $1.0490.&nbsp; Last week's low was near $1.0470.&nbsp; There is little enthusiasm for the euro ahead of the outcome of the FOMC meeting tomorrow.&nbsp; Note too that the upside looks blocked by chunky options struck at $1.06 that expire over tomorrow and Thursday (1.9 bln euros and 1.5 bln euros, respectively).&nbsp; The next area of potential chart support is the low from last 2016 near $1.0340.&nbsp; Sterling also remains in its recent trough.&nbsp; It is trading inside yesterday’s range, which was inside the range set at the of last week, approximately, $1.2450-$1.2615.&nbsp; Initial support now is seen near $1.25.&nbsp;&nbsp;<o:p></o:p></span></span></p><p><span><b><span>America</span></b><span><o:p></o:p></span></span></p><p><span><b><span>The US reports March factory orders and the final durable goods report and the JOLTS report.&nbsp;</span></b><span>&nbsp;Given that Q1 GDP was reported last week, and these data points will not impact expectations for revisions or tomorrow's Fed announcement, no important market reaction is likely.&nbsp; Arguably, the most important data today will be the April auto sales figures.&nbsp; Although they trickle in and the market typically does not react to them, auto sales feed into consumption and retail sales.&nbsp; They will likely be apart of the US economic resilience this year.&nbsp; The median forecast (Bloomberg survey) projects auto sales to increase to a 14.1 mln seasonally-adjust annual pace from 13.3 mln in March.&nbsp; It would be the first increase since January.&nbsp; Auto sales averaged 14.15 mln in Q1 and 12.76 mln in Q4 21.&nbsp; In Q1 21, they averaged nearly 16.7 mln.&nbsp;&nbsp;<o:p></o:p></span></span></p><p><span><b><span>Canada's April manufacturing PMI disappointed yesterday, slipping from 58.9 to a still robust 56.2.&nbsp;</span></b><span>&nbsp;Still, it was really the March reading that stands out.&nbsp; Canada's manufacturing PMI has been with&nbsp;a 56-handle for four of the past five months back to last December.&nbsp; Today, the March trade figures are due.&nbsp; Canada is benefitting from a positive terms-of-trade shock.&nbsp; The 3-month average trade surplus has risen to C$1.43 bln.&nbsp; A year ago, it was practically zero.&nbsp; It is the highest three-month since 2014.&nbsp; A C$3.75 bln surplus is expected today, which would be the largest since 2008.&nbsp;&nbsp;<o:p></o:p></span></span></p><p><span><b><span>Mexico has a quiet economic calendar after yesterday's flurry.&nbsp;</span></b><span>&nbsp;The manufacturing PMI held below the 50 boom/bust level at 49.3 (from 49.2 in March).&nbsp; However, the IMEF surveys have held in better.&nbsp; Separately, worker remittances into Mexico reached $4.68 bln, just shy of last October's record $4.82 bln. In March 2020, the stood at $4.16 bln.&nbsp;&nbsp;<o:p></o:p></span></span></p><p> </p><p><b><span><span>The US dollar briefly traded above CAD1.29 yesterday and set a new high for the year near CAD1.2915.&nbsp;</span></span></b><span><span>&nbsp;It pulled back initially but found support earlier today around CAD1.2835.&nbsp; The market looks like it wants to test the CAD1.29 area again.&nbsp; Today, there is a $585 mln option there that expires.&nbsp; The high from last December was closer to CAD1.2965 and that is the next key chart area.&nbsp; <b>Last</b>&nbsp;<b>Thursday, the greenback surged to MXN20.6380 but has since largely held below MXN20.50. In fact, it has not closed above MXN20.50 since March 17.</b>&nbsp; It seems to be in&nbsp;a consolidative phase with support near MXN20.35.&nbsp;&nbsp;</span><o:p></o:p></span></p><p><span><br /></span></p><p><span>Disclaimer</span></p><div>
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