The Overnight Report: RBA Doubt Creeping In

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This story features WESTPAC BANKING CORPORATION, and other companies.
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed up 46 points or 0.3% while the S&P gained 0.3% to 2114 and the Nasdaq added 0.2%.

Bank Blues

Saturday morning’s SPI futures had suggested a 34 point gain for the ASX200 yesterday and this might have come to pass were it not for Westpac ((WBC)). The bank’s “miss” on its earnings result set off a sizeable bank pullback which led almost half the index, being the financial sector, 1.1% lower.

Financials was nevertheless the only sector to finish in the red as other sectors surged ahead. Healthcare bounced back a percent, the telco was similarly sought, and the supermarkets posted a good session. Is the market locking in a rate cut today? The stand-out was materials, with a 2.4% gain, driven by an ongoing recovery in base metal prices as well as a growing belief iron ore may have bottomed.

The jump in materials came despite a weak reading on Chinese manufacturing from HSBC. The bank’s independent PMI fell to 48.9 from 49.2 to mark the lowest level in a year.

But yesterday’s Australian economic releases were more upbeat.

Cut Not Certain?

Building approvals jumped 2.8% in March when economists had expected a 1.5% decline. Annual approvals are running at 23.4% growth. While house approvals rose 1.1%, a 5.3% jump in apartment blocks underscores the reality that the residential construction boom is almost entirely multi-density driven. By contrast, plus 8.0% in non-residential construction in March looked good, but the annual rate is 19.7% contraction.

ANZ reported job ads rose 2.3% in April, having fallen in March. On a trend basis, ads have risen for 18 consecutive months which is consistent with an unemployment rate which (if accurate) continues to confound economists and the RBA.

TD Securities inflation gauges jumped more than expected in April, although at 1.4% annual for both the headline and trimmed mean (core), inflation is no impediment to the RBA cutting its rate today.

But will it?

The oil priced has bounced, the iron ore price has bounced, base metals prices have bounced, house prices continue to soar, building approvals suggest the resi-boom is ongoing, unemployment looks like it might fall again – what is it here that suggest the economy needs another sugar hit?

Perhaps yesterday’s grim outlook for engineering construction going forward from BIS Shrapnel, suggesting the fall in resource sector construction will be a lot more severe than the resi-boom can offset, will weigh on the RBA’s mind.

Either way, while economists remain almost unanimous in expecting a cut today, many are prepared to admit their resolve has slipped a little. Maybe it’s actually another 50/50 bet.

The Aussie has certainly baked in a cut, falling another 0.2% to US$0.7836. Watch out if the RBA disappoints.

And in other markets…

Charlotte? How dull. What was wrong with Kylie?

Across the Channel, the April eurozone manufacturing PMI came in at 52.0, down from March’s 52.2 but representing, believe it or not, 22 months of expansion. While it might have been a slight dip, markets latched on to the fact factory prices rose for the first time in eight months, suggesting a possible lift in inflation. Perhaps QE is working.

Greece and its lenders were hoping to nut out a solution by last night but they haven’t, so now we’re talking Wednesday, apparently. Despite the ongoing saga, both parties, and the markets, are growing more confident common ground will indeed be reached, and Greece will remain in the eurozone.

This has led to an easing of fears in European bond markets, and subsequent bond selling. A quiet tick-up in eurozone yields is ensuring a similar rise in US yields on a differential basis. Last night the US ten-year rose another 2 basis points to 2.13%, which is a long way from the 1.85% we saw a couple of weeks ago.

In the US, factory orders rose a healthy 2.1% in March, albeit in line with expectations. On Wall Street, the day’s earnings reports were again to the positive side and as the season slowly begins to wind down, it is clear fears of a dramatic drop in earnings in the March quarter were overblown.

Wall Street finished off its high for the session, but after last week’s volatility we are again pushing up towards previous all-time highs for the major indices.

Iron Ore Rebound

After having bounced very sharply from its lows, iron ore gave the impression last week it may have just been a blip, as prices ticked down once more. But last night the price jumped again, by US$1.60 to US$57.80/t, which will bring sighs of relief.

London was closed last night for its May Day long weekend so no base metal trading on the LME.

The oils were quiet last night, slipping just slightly to US$59.03/bbl for West Texas and US$66.46 for Brent. Both markets are looking increasingly content at these new levels.

Gold popped back up US$9.90 to US$1187.80/oz last night, despite the US dollar index rising 0.2% to 95.44, to allay fears Friday saw a technical break-down. Reading attempted explanations in gold market commentary only emphasises that’s no one’s got any idea.

Today

On Saturday morning the SPI Overnight closed up 34 points but Westpac spoiled the party when the physical market opened. This morning the SPI closed up 30 points, or 0.5%, and ANZ Bank ((ANZ)) is reporting.

Australia will see the April services sector PMI today and March trade balance but they won’t mean much before 2.30pm when the RBA stops the nation.
 

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