RBA keeps rates on hold

After a few days of holidays for most global markets, it seems equities have returned to trade in fine form. 

Source: Bloomberg

A poor jobs reading from the US wasn’t enough to deter investors from bidding equities higher and it seems the glass half full approach continues to resonate through markets. While the non-farm payrolls reading was a big miss, there were a couple of positives to be extracted from the data.

Firstly, investors feel the reading is enough to supress any urge to hike earlier rather than later. Remember the Fed has circled jobs and inflation as the key triggers for what they do with policy. However having said that, taking the average of jobs creation for this year so far is still above 200,000. Additionally these readings tend to be revised and we could easily see it revised higher. Unemployment claims have also been steadily falling which suggests the jobs market remains sound. As far as the Fed is concerned, it’s unlikely that one month’s data will make all the difference and we know the central bank only has to be reasonably confident that inflation and jobs will trend towards target over the next couple of years for it to act.

AUD strengthens on ‘surprise’ decision

Despite temporary weakness, the USD has actually remained firm in the aftermath of the disappointing jobs reading. Many would have probably expected to see some renewed greenback selling on the back of this, but it’s not the case. Structural weakness in key currencies such as the yen, euro and AUD is keeping the greenback buoyant at the moment. AUD/USD has been the currency to watch today, as traders positioned themselves ahead of the RBA rate decision and then reacted to the actual decision.

It had been a line ball call heading into the decision, with economists almost evenly split, while the swaps market was at around 66% probability of a cut. The RBA decided to keep rates on hold and judging by the spike in the AUD in response, it’s clear traders were skewed towards the short side.

Given there was no change, the conversation will switch to when this pending rate cut will be delivered. It’s clear the easing bias is still intact and the RBA may have missed an opportunity to send the local currency lower. Overall though, some of the recent data including today’s retail sales perhaps suggests there is no real urgency.

The statement itself didn’t really carry many changes from the last meeting and it just seems the RBA is buying itself some time to assess all Q1 data before pulling the trigger. The falls in the price of key commodities will be a big talking point though. Even more interesting was perhaps the spike in the currency in the moments before the announcement was made. This has happened over the past couple of meetings and ASIC is already investigating.

Local equities decline in response

The ASX 200 dropped a significant amount on the back of the rate decision after having rallied in anticipation of a cut. Banks retreated from early highs as the yield trade unwound fairly swiftly. There was also significant focus on the materials space today as iron ore prices continue to slump. The cracks are starting to show as the strain from weaker iron ore prices proves unbearable for the smaller iron ore players. With prices below $50/t, it certainly seems there will be more victims in the sector. Atlas Iron’s voluntary trading halt has left investors concerned that other similar players such as BC Iron and Mount Gibson which have also dropped in response. The knock on effect of struggling miners will certainly be felt by other sectors that directly depend on demand from miners. 

Firmer open for Europe

Ahead of European trade, we are calling the major bourses firmer, tracking the moves we’ve seen in the US and Asia. Data is limited but investors will continue to track any Greece developments with late headlines suggesting the country will make an IMF payment this week. We also have some services PMIs on the calendar, but this won’t be enough to cause any big moves. 

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