May Day holidays impacted activity in Asia but we had enough economic events on the agenda to keep us busy.
Most importantly, the RBA slashed the Cash Rate Target by 50bp to 3.75 percent, a sharper move than the market had been expecting with only a 30 percent chance of the larger cut priced in beforehand. AUD gapped 50 points lower versus the US dollar to just below 1.0350. In the accompanying statement the RBA commented that economic conditions had been somewhat weaker than expected and as such judged that financial conditions needed to be easier than in December and a 50bp cut was necessary to deliver the appropriate level of borrowing rates.
Inflation had moderated, leaving room for the more accommodative stance. On the external situation, it recognized that the European situation remained “very difficult” while the US continued to grow at a moderate pace. The slower China growth was as anticipated and is likely to remain at a more measured and sustainable pace going forward. The exchange rate remained high despite the drop in terms of trade.
The start of the April PMI reporting kicked off with contrasting outcomes. From Australia the manufacturing PMI went from bad to worse, registering hefty losses to 43.9 from 49.5, its worst since September 2011 and the second month in a row below the critical 50 threshold.
Weakness was reported across most sub-indices with output down 6.2 points, employment down 5.2 points, new orders down a sharp 6.2 points while the measure for inventories sank 6.0 points and that for supplier deliveries 3.9 points. Not a healthy report at all and giving additional justification (if needed) to the RBA move. There was more depressing news from house price data with two sets showing falling prices. The RPData-Rismark House Price Index fell 0.8 percent m/m following a 0.2 percent increase the previous month while data from the ABS showed prices falling at a faster rate q/q – 1.1 percent from -0.7 percent last.
In contrast to Australia, the manufacturing PMI data from China was mildly positive, rising to 53.3 from 53.1 (though not quite matching the market consensus of 53.6) and marking the fifth straight month above the 50 mark. The slight improvement echoed the sentiment seen in the flash HSBC PMI released last week, which nudged up to 49.1 from 48.3 (note the actual HSBC PMI will be released tomorrow) and may allay fears of a more severe China landing. Market reaction was distinctly muted but more a factor of holiday-mode rather than insight.
With USD/JPY sliding below the 80.0 mark for the first time in more than two months, it was inevitable that we would hear comments from Japanese officials at some stage. We did not have to wait too long for Finance Ministry spokesman Nakao to trot out the customary warning that “the ministry was closely monitoring the Forex market with caution so it can act in a timely, appropriate manner.” He voiced the opinion that the rapid strengthening of the JPY since the end of last week reflected speculative moves. The market ignored the comments. Maybe words from a higher-ranking official are needed?
Overnight moves were partly impacted by month-end flows though soft US data did have a part to play. AUD selling was rife and partly reflecting positioning ahead of today’s RBA meeting. EUR/USD survived an early dip to just above 1.32 as Spanish Q1 GDP came in marginally better-than-expected (but still bad!) and eurozone CPI was above forecast. CAD was dragged lower by a very weak GDP print in February (-0.2 percent m/m vs. +0.2 percent expected and +0.1 percent last).
On the US front, the Chicago PMI softened to 56.2 from 62.2 while the Dallas Fed manufacturing activity report was a disappointing -3.4 from +10.8 last. Personal income and spending were broadly in line with forecasts but March spending showed a sharp slowdown from February’s +0.9% to +0.3%.
Data Highlights
- US Apr. NAPM-Milwaukee out at 52.9 vs. 53.0 expected and 51.8 prior
- CA Feb. GDP out at -0.2% m/m, +1.6% y/y vs. 0.2%/2.1% expected and 0.1%/1.7% prior resp.
- US Mar. Personal Income out at +0.4% vs. +0.3% expected and revised +0.3% prior
- US Mar. Personal Spending out at +0.3% vs. +0.4% expected and revised +0.9% prior
- US Mar. PCE Deflator out at +0.2% m/m, +2.1% y/y vs. 0.3%/2.2% expected and 0.3%/2.3% prior resp.
- US Apr. Chicago PMI out at 56.2 vs. 60.0 expected and 62.2 prior
- US Apr. Dallas Fed Manufacturing Activity out at -3.4 vs. 8.0 expected and 10.8 prior
- AU Apr. Performance of Manufacturing out at 43.9 vs. 49.5 prior
- AU Mar. RPData-Rismark House Prices out at -0.8% m/m vs. +0.2% prior
- China Apr. PMI Manufacturing out at 53.3 vs. 53.6 expected and 53.1 prior
- AU RBA cuts Cash Rate Target 50bp to 3.75% from 4.25%