OVERNIGHT
The Reserve Bank of Australia (RBA) delivered a larger-than-expected hike in interest rates at its May policy meeting. The ‘cash rate’ was lifted by 25bp to 0.35%, more than the 15bp expected by financial markets. This is the first time in almost 15 years that Australian policy rates have been lifted during an election campaign, with RBA Governor Lowe signalling that further increases were likely in the months ahead.
A number of Asian equity markets remain closed for holidays, however, having opened sharply lower – the Hang Seng has now recovered back into positive territory. Elsewhere, equity market performance is relatively mixed ahead of the US Federal Reserve’s latest policy announcement tomorrow.
THE DAY AHEAD
Yesterday, a key measure of US factory gate sentiment – the ISM manufacturing index – unexpectedly dropped sharply as growth of new orders and output eased back in April. In part, the moderation in activity also reflected a rise in supply issues, related to the war in Ukraine and lockdowns in China, with US factories reporting longer lead times and further increases in prices. This backdrop of potentially moderating growth amid an uncomfortably high rate of inflation is symptomatic of trends across a number of major economies, albeit to varying degrees.
Central banks face the challenge of how to manage this divergence. The US Federal Reserve and Bank of England will deliver their latest policy announcements this week with both expected to hike interest rates. However, their guidance on further policy moves may show differences in their perceptions of the relative risk of higher inflation versus lower growth.
The Fed begins its two-day meeting later today ahead of its announcement tomorrow. Data wise, the calendar is light with only March readings for factory orders, durable goods orders (final) and JOLTS job openings due. Similarly, there is a dearth of key releases due across Europe. In the UK, the final reading of the April manufacturing PMI is not expected to be materially revised from the ‘flash’ estimate of 55.3, which was broadly unchanged from the March outturn.
MARKETS
The US dollar has trimmed some of yesterday’s gains but nevertheless continues to hold close to levels seen during the height of the pandemic in Q2 2020. 10-year US Treasury yields have also broken above the 3% mark for the first time since December 2018 in the run up to tomorrow’s policy announcement. With no major economic data releases due today, expectations for tomorrow’s meeting are likely to be a key driver of market moves today.
View report: iu.com.au/share/?dsctp=ifr&shr=msgfocus.com/files/amf_lloyds/project_1214/Monitor_Markets_20220503.pdf&hght=85&^~~~~
