Intraday Market Thoughts

RBA Unchanged Citing Uncertainty, PMIs Next

by Kyle Morrison
Aug 2, 2011 8:39

RBA leaves rates unchanged citing growth uncertainty in Europe and US, Growth worries in UK ahead of construction PMI, Eurozone PPI expected to slip back and ease pressure for higher rates as ECB meets this week. US House passes debt ceiling bill

This mornings decision by the Reserve Bank of Australia to leave rates unchanged at 4.75% wasnt too much of a surprise, even allowing for last weeks surprise rise in CPI. There has been some debate in recent weeks about the future direction of Australian interest rates, however the recent tightening in China along with some evidence of a slow down, amid uncertainty in Europe and the US has staid the RBAs hand.

The bank said that it remains concerned about the medium-term outlook for inflation and did consider whether recent information warranted further policy tightening, but given the fact that recent economic data has shown that downside risks for global growth has increased, it was felt prudent to leave rates as they were.

In the UK yesterday's July manufacturing PMI was a shocker, coming in at 49.1 and contracting for the first time since the recession in 2009, on the back of subdued domestic demand, even though export orders continue to remain strong. Today's July construction PMI should come in around 53.1, a slight decline from the 53.6 in June, but probably wont be enough to assuage concerns that the UK economy is starting to grind to a halt. Tomorrows services number will be the key number in that respect, given that services is the major contributor to UK GDP. As it is pressure is starting to build on the government to look at a plan B in light of yesterdays downgrading of 2011 growth forecasts by the CBI to 1.3% from 1.7%.

Pricing pressures in Europe could well start to ebb away despite last weeks slightly higher than expected German inflation numbers, with PPI prices for June expected to slip back slightly on a year on year basis from 6.2% to 5.9%. Given that Italian and Spanish 10 year yields are pushing the wrong side of the 6% level the last thing these countries need is a high inflation number given the ECBs almost one eyed gaze on suppressing higher prices with interest rate rises. This weeks ECB meeting will certainly be closely scrutinised for any mention of strong vigilance if todays numbers coming in on the high side.

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In the US the Republican controlled House of Representatives voted through the weekend agreement on the debt ceiling, leaving only a Senate vote today as the last obstacle. Now that this particular distraction appears to be behind us yesterdays shocking ISM data has shifted the focus back to the economy. It is highly unlikely that todays PCE numbers will be anything other than benign, as they have been for the last two to three years. This is the Feds preferred measure of inflation and one for which the US central bank has received a torrent of criticism for, given that it is so unrepresentative of pricing pressures in the economy.


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