US equity markets were able to pare losses from the dismal trade on Friday as investors found confidence on the back of positive economic feedback and Greece’s bailout package.The bailout package announced on Sunday evening totals 110 billion Euros over the next 3 years – 80 billion of which will be put up by Euro members, with 28 percent to be chipped in from Europe’s largest economy, Germany. According to Euro-group President Jean-Claude Juncker, the first instalment will be made before May 19. Despite the finer points of bailout seemingly ironed out, this failed to translate to positive things for the Euro which fell to lows of US$1.3154 – At the time of writing the Euro is buying US$1.32 down 130 pips from market open yesterday.
We also positive economic news from the States with The Institute for Supply Management (ISM) Manufacturing Index surpassing estimates to record a level of 60.4 from a previous 59.6. Analysts had predicted a slight fall to 59. Personal spending and income also printed in line with estimates.
Locally, we have the much anticipated rates decision at 14.30 AEST. It is now looking very much like a rate hike is on the cards, despite global recovery concerns and sovereign debt issues likely to create some reluctance across the board. We expect the RBA to lift interest rates by 25 bps to 4.5 percent this week in a bid to keep inflation under wraps which last week recorded first quarter growth of 0.9 percent representing an annual inflation rate of 2.9 percent from a previous 2.1 percent.
If we also look at the minutes for the April meeting as a precursor, the minutes painted a decidedly bullish picture of the local economy with a particular focus on expansion most of Australia’s major trading partners in Asia. The communication pointed to need to take immediate action in increase benchmark interest rates stating it was “prudent not to delay adjustment” in April, with the economic outlook suggesting “there was a case for a further step in the process of returning interest rates to more normal levels”. Neutral or normal interest rates are deemed to be around the 4.75 – 5 percent range.