Daily Market Digest: RBA holds rates, GBP volatile, Eurozone GDP revised higher

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Image via European Parliament / Flickr

The Reserve Bank of Australia left interest rates unchanged at 1.75% at today’s meeting. The Pound Sterling remains bullish but volatile, rising over 0.90% on the day. Eurozone GDP was revised higher to 0.60% for the first quarter. Here’s what’s moving the markets today.

Today’s Economic events

  • UK BRC retail sales monitor y/y 0.50% vs. -0.90% previously
  • Australia AIG Construction Index 46.7 vs. 50.8 previously
  • RBA leaves cash rate unchanged at 1.75%
  • Japan leading indicators 100.5% vs. 100.80%
  • German industrial production m/m 0.80% vs. 0.80%
  • French trade balance -5.2bn vs. -4.2bn
  • Switzerland foreign currency reserves 602bn vs. 588bn previously
  • UK Halifax HPI m/m 0.60% vs. 0.30%
  • Eurozone final GDP q/q 0.60% vs. 0.50%
  • The US revised nonfarm productivity q/q -0.60 % vs. -0.60%
  • The US revised unit labor costs q/q 4.50% vs. 4.0%

Coming up

  • Canada Ivey PMI
  • US IBD/TIPP Economic Optimism
  • The US consumer credit
  • New Zealand manufacturing sales

US Dollar steadies after Yellen’s speech

Federal Reserve Chair, Janet Yellen speaking in Philadelphia yesterday at the World Affairs Council, said that monetary policy was appropriate and was mildly accommodative, noting that it will be appropriate for the Fed funds rate to gradually increase, assuming inflation and job growth rises as expected. Yellen’s comments were a near repeat of her speech at Harvard University few weeks ago. She said that the markets should not read too much into just one single jobs report, referencing the May nonfarm payrolls report and suggested that in the broader context, the US job growth was steady and expanding.

“If incoming data are consistent with labor market conditions strengthening and inflation making progress toward our 2 percent objective, as I expect, further gradual increases in the federal funds rate are likely to be appropriate and most conducive to meeting and maintaining those objectives.” Ms. Yellen said.

Echoing similar sentiments, Atlanta Fed President, Dennis Lockhart said that despite the weak jobs report in May, he expects that the US economy is on track to grow 2% or more this year. Boston Fed President and FOMC voting member Eric Rosengren also said that he expects economic conditions to improve, justifying rate hikes but refrained from saying when the next step could be taken.

Given that the labor market contrasts with the pattern in the first quarter, and the pick-up in spending observed so far from other data, it will be important to see whether the weakness in this report is an anomaly or reflects a broader slowing in labor markets,” Rosengren said.

Yesterday’s speech by Janet Yellen marks the end of Fed speeches ahead of the 1-week blackout period. The full speech of Ms. Yellen can be accessed from here.

RBA holds rates steady, as expected

The Reserve Bank of Australia maintained the overnight cash rate unchanged at 1.75% in June, after delivering a 25bps rate cut a month ago. In the statement by Governor, Glenn Stevens, the RBA noted that “recent data suggest overall growth is continuing, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators have been more mixed of late, but are consistent with continued expansion of employment in the near term.”

However, the central bank was still concerned with low inflation. The statement said “Inflation has been quite low. Given very subdued growth in labour costs and very low-cost pressures elsewhere in the world, this is expected to remain the case for some time.”

The RBA’s decision was widely expected, but investors continue to speculate on more easing down the line. Yesterday, the MI inflation gauge, which measures inflation expectations, declined 0.20% in May after rising 0.10% in April. In the twelve months to May, inflation gauge increased 1.0%, but it was slower than April’s print of 1.50%, signaling falling inflation expectations. Sam Tsiaplias, a senior research fellow at the Melbourne Institute, said: “Whichever measure happens to be preferred, it is fairly clear that there is a sizeable gap between target and actual inflation.”

Craig James, chief economist at Commsec, notes that “the Reserve Bank to stay on the interest rate sidelines until August. At the August meeting the Reserve Bank will have digested the latest inflation data as well as the Brexit decision in the U.K. and the June and July rate decisions in the U.S.”

Sterling rises on volatility. Brexit TV debate in focus

The Pound Sterling is up 0.91% at the time of writing, erasing yesterday’s losses. The sterling plunged as new polls showed that the ‘Leave’ camp gained a lead over the ‘Remain’ camp. However, the narrative changed as in late Asian trading; GBPUSD spiked to a 4-day high near 1.465. New polls showing the ‘Remain’ camp gaining ground was attributed, but some analysts believe the morning’s spike which sent GBPUSD briefly higher by 113 pips as a ‘fat finger’ trade. Later today, British PM David Cameron and Nigel Farage will be featuring in a televised debate on the Brexit issue, which could keep the GBP volatile in the near term. The Financial Times’ poll of polls which takes the average of all the polls shows that the “Remain” camp has a lead of only 2%.

Danske Bank says that volatility on the GBP crosses will likely remain elevated ahead of the referendum.

Eurozone GDP revised to 0.60% in the first quarter

The final revision to the Eurozone GDP was revised to 0.60% from previous estimates of 0.50% on a quarter over quarter basis. On a year over year basis, GDP increased to 1.70%, up from 1.50% previously, data from Eurostat showed earlier today. The GDP revisions came as the first quarter household final consumption expenditure rose 0.60% in the euro area up from 0.40% in the previous quarter. Gross fixed capital formation jumped 0.80% while exports increased 0.40% and imports jumped 0.70%.

The euro reacted positively to the data but soon gave up the gains. In last week’s ECB meeting, Mario Draghi said that growth in the eurozone economy would slow down after the first quarter. He said that there needs to be a succession of positive quarterly growth in order to impact the sentiment in the region.

In other related news, German industrial production managed to rise in April, according to data from German statistics office, Destatis earlier today. Industrial production jumped 0.80% in April after falling 1.10% in March. The gains came on increase of investment goods rising 2.20% and manufacturing rising 1.10%, but construction activity fell 1.70% since March.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.