Central bank meetings in Australia, Japan and UK in focus. RBA likely to prove more interesting....
MAJOR HEADLINES – PREVIOUS SESSION
• US Mar. Change in Non-farm Payrolls out at -663k vs. -660k expected
• US Mar. Unemployment out at 8.5% as expected and 8.1% prior
• US Mar. Avg. Weekly Hours fell to 33.2 vs. 33.3 expected
• US Mar. ISM Non-manufacturing out at 40.8 vs. 42.0 expected and 41.6 prior
• AU ANZ Mar. Job Advertisements out at -8.5% vs. -10.4% prior
• JP Feb. Leading Index out at 75.2 vs. 75.3 expected and 77.2 prior
• JP Feb. Coincident Index out at 86.8 vs. 86.9 expected and 89.6 prior
THEMES TO WATCH – UPCOMING SESSION
• EU ECB’s Bini Smaghi speaks (0820)
• EU Euro-zone Sentix Investor Confidence Index (0830)
• EU Euro-zone PPI (0900)
• EU Euro-zone Retails Sales (0900)
• CA Building Permits (1230)
• CA Ivey PMI (1400)
• US Fed’s Warsh speaks (1700)
The US non-farm payrolls came in very close to expectations on Friday, -663k vs. -660k expected, and as such were treated as a “positive” number, given the speculation and fears that a number with a 700+ handle would be announced. Normal service resumed on the risk appetite front after some mild profit-taking, and the DJIA finished the week with its best 4-week run since 1933.
The spotlight reverts to central bank meetings this week, with the RBA rate review tomorrow likely to garner the most interest. Recall rates were left unchanged at 3.25% at last month’s meeting and the market is currently evenly divided in the outcome this time round. Earlier polls suggested the market was favouring a cut, predominantly 25bp but the minority for 50bp, as data over the past month came in generally on the soft side, but that has now swung to an unchanged verdict. A rebound in building approvals and a much better than expected trade surplus the major causes for the shift.
Nevertheless, sentiment remains fluid, with a weekend article in the AFR emphasizing the downside news on the Australian economy and opted for a 50bp cut. On the other hand, the RBA is looking for the additional stimulus measures to filter down into the economy and may wish to leave its options open for “adequate flexibility” as mentioned in the last minutes. Markets themselves are finely posed, with a 44% chance of a 25bp rate cut and a 56% chance they will be left on hold. While on the subject of possible rate cuts, Treasurer Swan was on the newswires this morning urging local banks to pass on any official rate cuts as soon as possible. To date, the 400bp of RBA easings since last September has resulted in a 360bp reduction in consumer rates.
Australia has also held court in Asia this morning with a string of second-tier data. March job advertisements were 8.5% lower than a month earlier and marked the eleventh straight month of losses. Newspaper advertisements remained soft, falling 6.6% on the month and a hefty 53.5% on the year, while internet ads were down 8.6% on month after a 9.4% fall the previous month. The implications for Thursday’s unemployment report are likely to remain negative and the risk is of a greater than expected decline than the 25k forecast and a higher unemployment rate than the 5.4% expected.
Other central banks in the pipeline for this week include the Bank of Japan and Bank of England. Both central banks are in a virtual cul-de-sac when it comes to rate cuts, so the only potential market moving developments would come from QE-related activities. With regard to the BoE’s QE measures, the FT highlights that yields in UK bond markets have risen sharply in the past 2 days, a result of a bullish G20 meet, stabilizing economic indicators and a general return of risk appetite across global equity markets. Current levels of 10-year gilt yields are way higher than what the bank views as necessary to induce so called “real money” investment funds and insurance companies to sell into, thereby easing pressure on corporate borrowing costs. It notes that the current risk appetite environment is making QE less effective, with yields stubbornly stuck just below pre-QE levels and may involve the BoE adopting a more aggressive policy to bring them lower. This may involve stepping up the amount of gilts it buys or even buying other types of securities, such as high-yield corporate debt or equities.
Gold has been a major victim of the continued risk appetite. Liquidation of stale longs and buoyant stock markets took gold back below the 900 mark and to its lowest levels since late January while concerns about excessive gold sales by the IMF in the future also hit sentiment. Elsewhere, Asia extended the theme from late Friday in both FX and equity markets, with the USD and JPY retreating though moves were regarded as calm and orderly.