The hawks versus the doves in central bank policy

As it is the first Tuesday of the month, macro day will most likely dominate the headlines here in Australia; however, overnight data from the US is what will influence the markets for the next several months.

US non-manufacturing PMI data came in well above expectation; at 56 versus 53.2 estimates, and last month’s 52.2. The ramp up in the US economy is not only gaining momentum but is accelerating. With sequestration expected to be filtered in to US households by the end of Q2, the uptick in PMI and other leading indicators will filter through to third quarter GDP; increasing the hawkish view of the Fed.

This is why the September taper talk will continue. Figures are strong, and with the Fed funds futures market now walking the same line as the Fed on US rates holding steady at +52 basis points for June ‘15, tapering the monetary stimulus has a clear path to market. For this reason we believe the blueprint for monetary stimulus tapering will be laid out in September with the first wind back in October.

The Fed has finally got its message crystal clear; the markets understand its stance and it is for that reason we believe they will spell out exactly how they will operate during the transition period from stimulus support back to ‘normal operations’ by the end of mid-2014 (or when the unemployment rate starts to hold or drop below 7%). This message will be rehearsed perfectly, to avoid the market behaving like ‘feral hogs ’as described by Dallas Fed President Richard Fisher.

Moving back to Asian trade, the numbers from the US overnight look like dragging on general trading. The S&P and Dow contracted overnight as investors continue to tread cautiously every time the word taper is brought up, as they look to navigate through what will be a tricky period of ‘untangling’ funds.        

The RBA meeting today has been debated to death; we know a 25 basis point cut is all but official. This has even allowed some venture into the realm of a 50 basis point cut prediction for today, ‘to allow the shock of a 50bps cut to jolt the economy into action’.

We understand the swaps market is factoring in 50 basis points of cut over the next 52 weeks, however we do not see this coming to fruition today; there are too many external variables that will steady the hand of the RBA to cut that hard.

As mentioned previously, the cut is factored in; the AUD looks to have moved to a level which is consistent with that call. What will push it lower are further dovish calls for the Australian economy and the end of the slowing of the mining boom. If the statement shows a clear easing basis, the AUD may see the 87 cent handle as short bets in the dollar increase.

Moving to the open, we are calling the ASX 200 down ten points to 5101 (-0.2%) as the market again tests the 5100 point mark. With earning season starting in earnest today, the results from Downer EDI and Cochlear will drive expectation; particularly Downer in the mining services space which has seen a year it would rather forget. With company guidance at $210 million net income, some are calling this conservative and a possible upside surprise could be in order for a sector screaming for good news. 

Materials plays again look like they could slip today; metals and oil fell overnight and with BHP’s ADR suggesting the stock should contract by 17 cents today to $35.58 (-0.46%) after falling in London on the back of contraction yesterday. This may indeed filter through to all parts of the materials sector. 

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