Daily Market Update 7 May 2013 - Welcome to RBA Tuesday!

Daily Market Update 7 May 2013 - Welcome to RBA Tuesday!

Reaffirming the pledge made last week that they were prepared to do more should the need arise, including the introduction of negative deposit rates if necessary, ECB President Mario Draghi spoke in Rome overnight, telling the audience that “there are many complications and consequences to take into account that need to be studied carefully and the council has decided to study them, to analyse these consequences in order to be able to act if necessary”. Unsurprisingly, stocks went bid and the Euro offered in the immediate period following the statement.


Eurozone service sector activity continued to decline in April with Markit’s PMI gauge<http://www.markiteconomics.com/Survey/PressRelease.mvc/d3f4ed144d07427984bae2b7a20973d9> coming in at 47.0. While still deep in contractionary territory, the figure was better than the 46.6 ‘flash’ reading released in late April with minute improvements in the German<http://www.markiteconomics.com/Survey/PressRelease.mvc/43e5847b548442efbeb738e32e628838>, French<http://www.markiteconomics.com/Survey/PressRelease.mvc/55d5dcacd15d423faeb978db609304cb> and Italian<http://www.markiteconomics.com/Survey/PressRelease.mvc/21c5a78f59bc426594b33c0c1957df41> figures, all of which were on the wrong side of 50, able to offset another worrying decline in Spain<http://www.markiteconomics.com/Survey/PressRelease.mvc/11654c89b818428b90b46e5407508ce2>.


Eurozone retail sales continued to slide in March with Eurostat reporting<http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-06052013-AP/EN/4-06052013-AP-EN.PDF> a decline of -0.1%. While in line with market forecasts, downward revisions to prior data saw the annual rate slip to -2.4%, a result that was well below the -1.7% pace of February and forecasts for -2.2%.


European investor sentiment improved moderately heading into May with the Sentix Index<http://www.sentix.de/index.php/component/option,com_rokdownloads/Itemid,221/id,727/view,file/> rising to -15.6. While higher than the -17.3 figure of April, the result missed expectations for a rise to -15.2 and was well off the -3.9 high struck in February of this year.


Canada building permits surged higher in March with Statistics Canada reporting<http://www.statcan.gc.ca/daily-quotidien/130506/dq130506a-eng.pdf> an increase of +8.6%. The figure was above the +1.5% rise of February and forecasts for an increase of +1.0%.


The Day Ahead (All times AEST)


The ASX 200 looks set to open firmer this morning with SPI futures pointing to a rise of 13pts on the open. Mimicking the price action seen in offshore markets, financials will likely do the heavy lifting although volumes are likely to low in the lead up to the RBA rate announcement at 2.30pm. From there it’ll be a pretty simply scenario with the best outcome a rate cut and continued easing bias from the Board while keeping the status quo, leaving rates unchanged and stating they can ease if required, likely to a have a detrimental impact on the market.


Weighed down by rumours famed hedge fund manager George Soros was shorting it before today’s RBA rate decision, the Aussie Dollar has struggled overnight with the currency touching a low of 1.0223 before bouncing modestly into the close. As is the case with the ASX 200, its direction today will almost entirely be determined by the RBA rate decision with a cut likely to see traders target stops below 1.0220 and 1.02 while a non-move will see the currency scoot back above the 103c level.


The Reserve Bank of Australia May monetary policy meeting will be held this morning with the accompanying announcement and statement to be released at 2.30pm this afternoon. While markets are evenly priced for a 0.25% cut, something that’d take the cash rate to a record-low 2.75%, most economists expect the Board to hold fire until they receive further economic data, including important CapEx numbers, later in the month.


While economists suggest they’ll stay put, we’re siding with the markets (and money) on this one with the odds of a 0.25% easing currently priced at 52%. While we can understand the logic some are using to justify another pause, the RBA will get further data including CapEx, existing house prices are rising, if only moderately, while retail sales are again trending higher, with non-mining sectors still weak, the medium-term inflation outlook benign and the mining boom decelerating faster than what had been initially expected, we feel that now is the time for the RBA to act on their pledge “to ease policy further, should that be necessary to support demand”. Forward indicators such as domestic PMI surveys, building approvals and job ads are all weakening, the data pieces that really need to be strengthening, while at the same time future capital expenditure plans are being revised lower on the back of weaker commodity prices, high operational costs and feeble domestic and global demand. Throw in weak credit growth, higher unemployment and the persistently-strong Aussie Dollar and the case for the RBA to take pre-emptive today appears strong.


Australian data releases today include trade numbers for March, the AIG Performance of Construction Index for April and Q1 house price survey. On the regional front, New Zealand Q1 labour costs will be released earlier in the session.


A European-centric data calendar this evening with German industrial orders, French industrial output and trade, Swiss unemployment and consumer confidence and US consumer credit all scheduled for release. For those who’d like to get a ‘sneak peek’ as to what the Chinese trade data will likely look like tomorrow, Taiwanese trade data for April will be released at 6pm this evening.


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