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Daily Market Digest: RBA minutes, German court ruling, UK public debt

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German constitutional court today ruled in favor of the ECB’s OMT program, noting that the ECB’s unlimited sovereign bond purchase program was within the legal boundaries. In the UK, public debt narrowed in May but remains higher. Markets await Janet Yellen’s speech later this evening.

Today’s Economic events

  • RBA monetary policy meeting minutes released
  • BoJ monetary policy meeting minutes released
  • Australia HPI q/q -0.20% vs. 0.80%
  • Japan all industries activity m/m 1.30% vs. 1.30%
  • Swiss trade balance 3.79 billion vs. 2.88 billion
  • German constitutional court ruling
  • UK Public sector net borrowing 9.1 billion vs. 9.5 billion
  • German ZEW economic sentiment 19.2 vs. 5.1
  • Eurozone ZEW economic sentiment 20.2 vs. 15.3
  • CBI industrial order expectations -2 vs. -10

Coming Up

  • ECB President Draghi speech
  • Fed Chair Yellen speech
  • FOMC Member Powell speech

RBA meeting minutes show policymakers concerned with inflation

Policy makers from the Reserve Bank of Australia said that low inflation enabled the RBA to keep the key interest rates low, data from the minutes from the June policy meeting showed today. The minutes said that consumer price inflation was below trend and is expected to stay that way in the near term, which enabled the central bank to keep the interest rates unchanged at 1.75% following a 25bps rate cut in May.

The RBA policy makers judged that holding monetary policy steady at the June meeting was consistent with sustainable growth in the economy. The minutes said, “Short-term measures of inflation expectations – from consumers, market economists, union officials and inflation swaps – had remained below average. Long-term inflation expectations had also remained below average.”

Recent economic data from Australia showed that growth was continuing to expand and that the Australian economy saw support from a weaker Australian dollar alongside increase exports. However, business investments continued to decline. The Australian economy expanded 3.10% in the first quarter this year, marking the fastest pace of growth seen in nearly three years.

Lower interest rate from the RBA is being seen as supportive of domestic demand and that the lower exchange rate was helping the traded sectors, the meeting minutes showed.

“Growth over the year had increased to be a bit above estimates of potential growth, reflecting a stronger expansion in non-mining activity. This was being supported by low-interest rates and the depreciation of the exchange rate since 2013,” the minutes said.

Analysts still expect the RBA to cut rates later this year, although the timing of future rate cuts remains questionable at this point. More recently, Australia’s labor market data showed that the unemployment rate remained steady at 5.70%, but most of the job gains continued to come from part-time workers.

German constitutional court rules in favor of ECB’s OMT

Marking an end to four years of judicial battles, filed by nearly 35,000 German academics, businessmen and politicians, Germany’s highest court ruled in favor of the European Central Bank’s OMT or Outright Monetary Transaction program.

In its ruling, the constitutional court said, “The OMT program does not currently impair the Bundestag’s overall budgetary responsibility and does not ‘manifestly’ exceed the competences attributed to the European Central Bank.”

The OMT program was launched in 2012 when the Eurozone plunged into a financial crisis. Under the program, the European Central Bank can legally purchase unlimited bonds from distressed member states, in order to counteract any sharp rise in borrowing costs for the Eurozone governments. Arguing against the case was that the program violated German federal law through the illegal monetary financing of the Eurozone governments.

The German constitutional court ruling comes after last year, the European Court of Justice ruled that the OMT was in accordance with the EU treaty law. The positive verdict saw muted reaction from the euro but importantly, eased market fears ahead of the UK referendum vote this Thursday on its EU membership. A negative ruling could have impact market sentiment strongly spooking the financial markets. The court’s ruling concluded by saying “If interpreted in accordance with the Court of Justice’s judgment, the OMT program does not present a constitutionally relevant threat to the Bundestag’s right to decide on the budget. Therefore, it can currently also not be established that implementation of the OMT program would pose a threat to the overall budgetary responsibility.”

UK public sector borrowing narrows in May

Public sector net borrowing or PSNB in the UK was slightly lower at £9.1 billion in May, down from £10.1 billion in April, data from Office for National Statistics showed earlier today. The public sector net borrowing excluding public sector banks was at £9.1 billion in May and was slightly higher than forecasts, despite falling £400 million on a year over year basis. Borrowing for April was revised higher from initial forecasts of £7.2 billion to £8.2 billion. The total government debt was unchanged staying at 83.70% of the GDP. Overall spending increased 2.10% on the year while receipts held firm with 3.40% annual increase, while the increase in income tax held steady at 1.20% for the year.

The overall budget deficit amounts to nearly 5% of the GDP, half of what it was during the financial crisis.

Samuel Tombs of Pantheon Macroeconomics said, “May’s overshoot mainly reflects weaker year-over-year growth in tax receipts.” He said that the latest figures provide a taste of what Brexit could do, to the health of the government’s finances, cautioning that despite a vote to stay in the EU, UK only has a slim chance of meeting the budget surplus goal.

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