Good morning,
Aussies meet expectations by cutting rates
This week was always going to be a week of central bank news and the Reserve Bank of Australia has kicked things off with a cut in interest rates to a fresh record low. Last week’s inflation numbers that showed a rather forlorn 1% gain on the quarter seems to have been the final nudge the central bank needed to bring rates to 1.5% overnight and although this is now seen as a de facto bottom in rates by investors, they said the same thing when the RBA cut to 2.5% and 2.0%.
The AUD dipped by around 0.50% as soon as the announcement was made but has since recovered those losses. Commodity currencies were put under pressure yesterday by the USD with fresh falls in the price of a barrel of oil putting crude into a bear market – measured as a 20% fall from its most recent highs.
The overall reaction of the AUD however has been a bit wet and while there is an argument for some kind of relative support to come from a weakened USD following last week’s GDP report, it is exactly that; relative. There was little mention of further easing from the RBA although they seemed happy to talk about lower rates having less of an impact on the housing market than had previously been thought. AUD still has an OK yield and very low political risk, compared to most, and therefore we can still see that remaining as support to buyers of the currency.
Japan stimulus unlikely to hurt the yen
In further news of stimulus and following the relative disappointment of the Bank of Japan’s latest policy meeting last Friday the Japanese government is set to unveil its fiscal stimulus package this morning. According to a draft seen by members of the press the plan will total some 28.1 trillion yen and include spending on infrastructure, low cost loans and on steps to improve demographics.
This will likely disappoint once again in my opinion, and we think that it will be difficult for the yen to materially weaken on these steps given geopolitical risk and the continued dissatisfaction with the announcement last Friday.
UK manufacturing plumbs new depths
Yesterday’s manufacturing PMI number surprised nobody by marking a new low after Brexit. Markit’s flash estimates published 10 or so days ago had already shown a decline in business operations at its fastest for 7 years, a move that was able to prompt Bank of England member Martin Weale to retreat from a rather hawkish stance and instead back stimulus at this Thursday’s meeting.
Yesterday’s more complete look at the sector showed the biggest monthly drop in new orders for 18 years. Exports grew but by a lesser amount than had been originally forecast given weak overseas demand growth.
Construction set to be burnt by Brexit
The latest news from the construction sector is due today and while sterling has been the most prominent barometer of Brexit risk since June 23rd given the dangers of the UK’s current account and the level of borrowing from abroad that the UK must undertake, the housing market has felt a huge impact.
Property website Rightmove reported last week that 60% more properties are putting through listing price reductions in London, with the number hitting 23% outside London although they didn’t say by how much they were being reduced. This then translates to negative wealth effects such as lower retail spending, falling service sector profitability and leads our calls that the UK is heading for a recession through the 2nd half of the year.
The UK construction PMI is due at 09.30
Have a great day.