Cash rates remain on hold at 1.5% as expected

6 December, 2016

European Outlook: Asian stock markets managed to move mostly higher, after gains in Europe and on Wall Street yesterday. The Italian MIB closed with slight losses Monday, but it seems investors quickly got over the widely expected rejection of Italy’s constitutional reform and Renzi’s resignation. Italy may once again have to look for a new government, but that is hardly anything new in a country where it is extremely rare for a government to last full term Italy is hardly heading for an exit from the EU, even if EMU membership is under scrutiny in some quarters, but the problems of Italy’s banks will likely come back to the forefront and keep pressure on Italian markets, which actually managed to outperform in the last week ahead of the referendum. Still, U.S. and European stock futures are heading south this morning, and oil prices are down. The European calendar has German factory orders at the start of the session, which are expected to rebound from the contraction in September. There is also the final and detailed reading of Eurozone Q3 GDP and Swiss inflation data. Already released overnight, U.K. BRC like for like retail sales came in weaker than expected.

RBA Rates left unchanged: Cash rates remain on hold at 1.5% as expected. “Rising AUD could complicate economic transition” Steady policy consistent with growth and inflation targets, global economy growing at a slower rate but Chinese economy has “Steadied”.  Large supply of apartments to hit housing market (where prices are rising “briskly”)  in the next few years. Global inflation more balanced than for “some time”. Labour market conditions have improved and commodity prices have risen. However, outlook for inflation remains “low for some time”.  AUD unchanged following announcement and statement.  RBA next meet February 8.

US Reports Yesterday: The U.S. ISM-NMI bounce to a 1-year high of 57.2 from 54.8 in October, but a similar 57.1 in September, left the measure much closer to the 10-year high of 59.6 in July of 2015 than the 6-year low of 51.4 in August. The ISM-adjusted ISM-NMI bounced less sharply, to 56.1 from 54.2 in October, versus an 8-month high of 56.3 in June, a 10-year high of 59.0 in July of 2015, and a 6-year low of 50.7 in August. The ISM-adjusted average of the major producer sentiment surveys surged to a 16-month high of 53 from 51 in October and 50 in August and September. We saw a 49 expansion-low in January and February, and previously in October of 2012. The employment gauge surged to a 1-year high of 58.2 from 53.1.

FedSpeak:  St. Louis Fed hawk-dove Bullard: new tax, fiscal and regulatory policies in Washington could make the U.S. a higher-speed economy if they improve productivity. But any such policy changes should not be viewed as needed stimulus since the economy is not in recession. The impact on current low-growth, low interest rate regime depends on proper execution and focus on productivity improvements. Absent such changes, he’s still sticking with his one-rate-hike-only call to reach neutral policy, which is appropriate since inflation and unemployment are close to target. But this appears to give him an exit strategy if the fiscal outlook changes significantly. Dudley of NY Fed on CNBC: it’s premature to take on board market views of fiscal expansion, he said, but if fiscal policy got more expansive, the Fed would probably remove accommodation more quickly. But it depends on the specifics of any fiscal stimulus, which is as yet unknown. He’s essentially echoing his earlier speech on the economic outlook and he’s generally pleased that there has been an uptick in wages and inflation, which was the goal. Dudley notes that there will be lags in implementing any fiscal legislation, however, and any Fed policy adjustments as a result will be out over the horizon. Overall, he sees “downside risks to the economy reduced.” Dodd-Frank is not perfect, so changes are appropriate, but essential ingredients on capital requirements, etc. should remain. He also sees the rising dollar as consistent with expectations about growth. He is making a bid for automatic fiscal stabilizers again as well. Evans: we’re on cusp of period of rising rates, said the dovish Chicago Fed president, and he expects inflation to move “more solidly” toward the Fed’s 2% target. He said the state of demand in the U.S. is really quite good, growth should continue and with unemployment at 4.6% you don’t need explicit infrastructure stimulus. Evans echoed Dudley, saying we need to have patience to assess what the new administration’s policies will be, though policies under discussion could reinforce the U.S. growth trajectory. This is more optimistic on the growth front for Evans, therefore slightly more hawkish by implication.

Main Macro Events Today                

EUR Gross Domestic Product –  Year on Year Eurozone area GDP is out later this morning and it is expected to remain unchanged at 1.6% with Month on month GDP also unchanged at 0.3%.

US Factory Orders – October factory goods data is out later today and should reveal a 2.6 increase for the headline with shipments up 0.3% and inventories up 0.2%. This follows respective September figures which had orders up 0.7%, sales up 0.9% and inventories up 0.1%. Data in line with forecasts would leave the I/S ratio unchanged from September’s 1.34.


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