RBA Spiced Up This Morning’s Asian Session

Markets

European financial markets enjoyed a long weekend up until yesterday but Wall Street was open for business. The US during pre-market trading hours announced JPMorgan will take over First Republic Bank in an auction run by federal regulators. The troubled California-based bank brought back general bank sector nervousness ever since its quarterly results last week revealed a >$100bn depositor flight. The deal puts the unrest to bed just days ahead of the Fed policy meeting (Wednesday). US yields advanced in early dealings with an acceleration kicking in after the manufacturing ISM came in better than expected. The headline figure rose from 46.3 to 47.1 vs 46.8 anticipated. That’s still in contraction territory but the gauge not sliding any further is a preliminary positive sign. The recovery was broad-based across subseries. Most of them nevertheless stayed sub 50 except for prices paid (53.2) and employment (50.2). US rates at the end of the day sprinted between 12.9 and 15.1 bps higher with a minor underperformance at the belly of the curve. The 2y yield surpassed the 200dMA and in doing so created some distance with the 4% support area. The US dollar rallied against most of its peers. DXY (trade-weighted) closed near recent highs at around 102.15. EUR/USD slid towards the lower bound of the upward trading range around 1.097. US equities didn’t stray too far away. Major indices closed with negligible losses.

The RBA spiced up this morning’s Asian session by unexpectedly hiking policy rates to 3.85% (cfr. below) and keeping the door open for more as inflation remains way too high (7% y/y in Q1). Aussie yields and dollar surge. AUD/USD tries to recapture 0.67. Stocks in the Asian-Pacific region mostly gain with China outperforming. The RBA’s surprise adds to the FRB solution and the tentative bottoming out of the US manufacturing ISM. European inflation figures later today are to elongate the list of hawkish arguments for central banks to stay the tightening course, in this case for the ECB on Thursday. The April headline number is expected to come in at 6.9%, matching the March figure that was heavily impacted through base effects. A 0.7% monthly pace reveals expectations for a still very strong inflationary dynamic. Some countries last week showed national core inflation easing (eg. Belgium, Spain), leading consensus to lower their estimate for the European-wide figure to 5.6%. That would imply a marginal easing from the 5.7% seen in March. Even if that would materialize, it’s unlikely to sooth ECB governors. Apart from the April EMU CPI number, the ECB’s Q1 credit and lending survey will be released today. This survey is at least as important in making or breaking the case for another 50 bps rate hike. Given that markets currently discount no more than a 25 bps move, an above-consensus CPI and/or a resilient credit survey surely won’t go unnoticed.

News and views

The Reserve Bank of Australia (RBA) surprised markets by lifting its main policy rate by 25 bps to 3.85% following a pause last month. The central bank wanted some additional time to assess the state of the economy and the outlook. Australian inflation has passed its peak, but at 7% is still too high and it will be some time yet before it is back in the target range of 2-3%. RBA forecasts put inflation a 4.5% this year (from 4.75% in February) and 3% mid-2025. Especially services inflation and briskly rising unit labour costs are a cause of concern. The Australian labour market remains very tight with unemployment at a near 50-yr low (3.5%). The RBA 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 historically low rate of unemployment. Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve. Household spending is an RBA-worry which could prompt a new pause. Australian swap yield added 5.6 bps (30-yr) to 22.5 bps (2-yr) this morning. The Aussie dollar benefits from the unexpected yield support with AUD/USD rising from the low 0.66 area to above 0.67. For now, the YTD support are just below 0.66 survives.