Market Wrap.
Not so Lowe.

RBA’s surprise Cash Rate hike of 25bps (to 3.85%) was the key focal point for markets whilst China remains closed until Thursday and much of Asia and Europe were closed yesterday.
Although there were around 30% of BBG’s pool of forecasters suggesting that RBA could hike, the market was pricing in a mere 2bps to 3bps and was clearly caught off guard with AU 3yr yields spiking up 22bps and AUD/USD spiking up 1.3% to 0.6715 (initial reaction was to 0.6675) and remaining around 0.6705-10 (+1.15%) in early European trading.

Media responses have referred to the “courage” of RBA to hike and cite their “four key points” and the potential of “more to come” in the face of sticky inflation, with RBA citing tight labour markets and service sector inflation.

Westpac’s Bill Evans points to the surprise of the decision given what had been seen as implied on hold guidance with respect to their data dependence and 1Q CPI coming in under projections, but also that the policy decision was “the better policy option”.

The clear continuation of a tightening bias will mean that markets will keenly await Gov. Lowe’s Perth speech (beings 19:20 AWST) and updated forecast profiles within Friday’s Statement on Monetary Policy (SoMP).

Asian PMI releases were generally firm, if mixed, with markets remaining relatively subdued outside of the shifts in Australasian markets, though NZD did lift against USD on the tail of AUD gains (NZD testing 0.6200 as AUD pushed above 0.6710, even if AUD/NZD rose to 1.0835).

Eurozone and UK final Manu PMIs came in firmer than their Flash readings (Eurozone 44.5, Flash 44.0; UK 47.8, Flash 46.6) but the more important release in the region was Eurozone preliminary April CPI.
Uncomfortably high Dutch, Austrian and then Italian readings offset the mildly lower profile from Germany last week and so the regional readings were on the firm side.
Headline CPI actually ticked up to 7.0%y/y (est. 6.9%y/y, prior 6.9%y/y) with the important Core CPI edging back to 5.6%y/y (as expected) from 5.7%y/y.

Eurozone CPI and PMI data had only limited impact on EUR and regional markets with UK Gilt yields and Bund yields catching up with the rebounds in US yields yesterday.
10yr Bund and Gilt yields rose +5bps (to 2.36% and 3.77% respectively) with US yields pulling back -4bps to 3.43%.

Market attention began to turn towards US data, the debt ceiling and FOMC rate hike potential and USD rebounded from earlier mild softening.
EUR/USD slipped to 1.0960 (-0.15%, from brief tests above 1.10), GBP/USD -0.2% to 1.2475 (had tested 1.2510) with AUD edging back to 0.6690 (+0.9%) and NZD at 0.6195 (+0.45%).

JPY had weakened to test 137.75 before consolidating at 137.50 (flat).

European stock markets unwound minor early gains with FTSE 100 effectively unchanged, DAX -0.2% and CAC 40 -0.4% whilst US futures were around unchanged.

As noted, RBA Gov. Lowe speaks in Perth at a regular RBA Board Dinner as US markets open.

US data releases include March JOLTS start the week’s employment data focus (NFP on Friday) and March Factory Orders.

NZ 1Q Employment data is released tonight and AU March retail sales and the Final Services PMI are also released.

WE GET

· AU: (F) Service PMI & Ret. Sales (3^rd), Trade (4^th), RBA SoMP & Home Loans (5^th), NAB Business Conf. & Bldg. Permits (8^th), CBA Household Spending, Westpac Cons. Spending & MI Cons. Infl. Exp. (9^th)

· NZ: 1Q Employment Report & RBNZ FSR (3^rd), Building Permits & Commodity Prices (4^th), Card Spending (9^th), REINZ Hse. Px. (tbc), Food Px. (11^th), BizNZ PMI, Net Migration & 1Q Inf. Exp. (12^th)

· EZ: Ge Trade, (F) Serv. PMI, EZ PPI & ECB Policy (4^th), Ge Factory Orders & EZ Ret. Sales (5^th), Ge Ind. Prod. & EZ Sentix Survey (8^th), Ge (F) CPI (10^th), EZ Ind. Prod. (15^th), Ge WPI (tbc), ZEW, EZ 1Q GDP & EZ Trade (16^th)

· UK: Consumer Credit & (F) Serv. PMI (4^th), BRC Sales (9^th), RICS Hse. Px., Monthly GDP/Prod., 1Q GDP, Trade & BoE MPC (11^th), Employment Report (16^th), CBI Trends (tbc)

· US: JOLTS (2^nd), Factory Orders (2^nd), ADP Empl., (F) Service PMI, Service ISM and FOMC (3^rd), Challenger Jobs, Trade, 1Q Productivity & Claims (4^th), NFP/Employment (5^th), Wholesale Inventories (8^th), NFIB (9^th), CPI (10^th), Claims & PPI (11^th), Imp/Exp Px. & U. Mich. Cons. Sent. (12^th)

WESTPAC PUBLICATIONS

RBA May Board Meeting : RBA Hikes Cash Rate by 0.25%.
Bill Evans

· RBA hiked 25bps to 3.85% which came as a significant surprise, less than 5bps were priced in, as markets had difficulty following RBA’s policy guidance.

· Westpac had noted preference for a Cash Rate peak of 3.85% as a “better policy approach”, RBA guidance on data dependence and better than anticipate 1Q CPI suggested “on hold”.

· RBA noted service sector inflation and tight labour markets with inflation remaining too high, and so maintained a tightening bias. Westpac still see rate cuts beginning in 1Q’24.

Market Responses to May RBA Rate Decision : Rapid response to market moves.
Sean Callow, Damien McColough

· FX – 25bps hike (3bps priced in) triggered spike from 0.6630 to 0.6690, later breaching 0.6700, with scope to test 0.6734 and 0.6790 mov. ave. levels, if FOMC delivers a “dovish hike”. AUD/NZD should make a run at 1.0900.

· RATES – Market was trading heavily and immediately posted 17 tick spike in 3yr and 8ticks in 10yr with curve flattening. Curve should flatten further and AU-US spread remains sub zero.

· RBA Side-by-side highlights key changes in the RBA statement from April.

AU April 2023 Red Book : (Published 1^st May) An in-depth assessment of AU Consumer.
Matthew Hassan

· Westpac-MI Consumer Sentiment lifted 1.8% in three months to April, but remains deeply pessimistic, despite gloom lifting as RBA paused, and risk averse.

· House price expectations have shown a decisive lift, but are not overly bullish, though labour market buoyancy is starting to wane, even if there are few signs of job-loss fears.

AU April House Dwelling Prices : (Published 1^st May) Broad picture continues to show stabilisation.
Matthew Hassan

· CoreLogic April home value index rose +0.7m/m, -8.4%y/y (+0.8%m/m gain in Mar.) and correction looks to be clearly over for both prices and turnover (consistent with Westpac’s revised view).

ADDITIONAL PUBLICATIONS
G10 FX Model & Themes : Slicing and dicing the G30 currencies.
Richard Franulovich

MODEL

· USD flips (+1%) to neutral and EUR short remains (-8%) ahead of FOMC and ECB. JPY (+4%) and AUD (+5%) neutral. NZD short (-18%) despite yield pick up. NOK (+31%) favoured long.

THEMES

· FX markets establishing some clear regional preferences. European currencies (advanced and emerging) have been the hands down outperformers in the last two months.

· At the other end of the spectrum, the G10 commodity and North East Asian currency blocs have been notable underperformers.

NZD FX Weekly : Weekly update on NZD crosses and outlook.
Sean Callow

· Slightly bearish NZD/USD bias retained for the week ahead, although there is ample potential for surprises given major event risk.

#redbook

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