RBA hikes rates as expected but statement has dovish undertones
The surprise BOJ emergency meeting contains no surprises
A greater sense of calm surrounding the Dubai debt problem saw the familiar theme of a weaker dollar dominate activity overnight, with US bond markets little changed and Wall St managing to eke out marginal gains. Month-end factors largely proved to be a non-event this time round.
US data was generally better than expected with Chicago PMI data coming in at 56.1 vs. 53.0 expected and 54.2 last and the Milwaukee equivalent rising to 57.0 from 50.0. Dallas Fed manufacturing activity also rallied 0.3% vs. a flat reading expected. Canada’s GDP data for Q3 was a disappointment, reaching just 0.4% q/q growth vs. 1.0% expected, though the reaction in FX was a mere 20 pips.
So, we are on the final leg into year-end with a noticeable drop in volumes in Asia on the first day of December. Is it just psychological ? Or an indication of things to come over the next 20 trading days or so? We did manage to find some volatility however, some of it expected and some of it not.
The first item to hit markets was a rumour that North Korean leader Kim Jong-il had died. In perhaps a testimony as to how fragile sentiment really is at the moment, Asian bourses fell and the dollar had a temporary surge, but it proved fleeting and we were back to normal within minutes with the rumour subsequently quashed by comments from South Korea’s Unification Ministry.
Shortly after that, surprise headlines hit that the Bank of Japan was to hold an extra-ordinary policy meeting later in the day with a press conference scheduled for 0730GMT. Market speculation went into overdrive with results varying from cutting rates as low as zero (though BOJ Gov. Shirakawa has already stated that he hates ZIRP), increasing outright purchases of JGBs from the market from the current ¥1.8 tln per month and announcing additional liquidity provision for money markets into year-end. In the end the post-meeting announcement was a bit of a disappointment. Rates were left unchanged but they announced the provision of ¥10 tln worth of funding in a 3-month fixed rate operation at 0.1%, offered against the BOJ’s regular collateral. The rally in the JPY crosses and the USDJPY were reversing immediately post-announcement and we look to be reverting to previous levels.
The RBA rate meeting panned out as expected, with the RBA hiking rates another 25bp for the third meeting in a row, bringing rates back up to 3.75%. The accompanying statement was interpreted as a touch dovish, given that the tone appeared to be more backward-looking rather than forward hinting. The RBA said that recent rate hikes were “material adjustments to the stance of monetary policy” and would work to increase the sustainability of growth in economic activity. Apart from this, the central bank focused on the relatively mild downturn and rebound and commented that the outlook remained similar to that seen in the November statement. It added that growth would be close to trend in 2010 and inflation close to target. The indication of a potential pause (the next meeting is not until February anyway) led to a flattening of the AUD yield curve and after a brief peep higher, AUDUSD tumbled lower triggering a few stops but still found willing buyers at the base near 0.9130.
Looking ahead into Europe, the early BOJ press conference may spring a surprise or two. Data-wise it is the customary PMI-fest at the start of the month with data from Sweden, Switzerland, Germany, UK and the Euro-zone. German unemployment and UK house prices from Nationwide also feature. US ISM data this evening, along with pending home sales and construction spending, complete the diary for today.
