RBA Raises Interest Rates
OVERNIGHT
Equities across the Asia-Pacific region are mostly trading lower this morning, in part driven by the larger-than-expected hike in interest rates by the Australian central bank. The Reserve Bank of Australia (RBA) lifted policy rates by 0.5%, above the quarter-point increase expected by markets to take the Cash Rate Target to 0.85%. Interest rate markets are pricing in further aggressive tightening with the cash rate seen rising above 3.5% in the next 12 months. Domestically, UK PM Johnson survived last night’s confidence vote by a majority of 63 (211 for Mr Johnson vs 148 against). Mr Johnson is set to reconvene his cabinet this morning to outline plans for an announcement on a new set of policy commitments in the coming weeks.
THE DAY AHEAD
In the UK, the final reading of the services PMI report for May is expected to confirm that a marked slowdown in service sector activity occurred last month. The ‘flash’ reading reported a drop in the headline index from 58.9 to 51.8, a sharp loss of momentum compared with April and consistent with only modest growth. The softening in the pace of growth was partly attributed to the war in Ukraine and China’s lockdowns, as well as the cost-of-living crisis. In response to the latter, Chancellor Sunak announced an additional package of measures worth £15bn to support mainly the most vulnerable households, including one-off payments for low-income households, pensioners and the disabled. There was also universal support for all households with a doubling of the energy rebate to £400 which is now a grant rather than a loan. Overall, according to the Treasury’s analysis, the measures announced both this week and in February, will benefit households in the lowest income decile by around £1,200. The average household will benefit by about £800. However, speaking in front of a Treasury Select Committee yesterday, Mr Sunak said that it was not possible to fully insulate people from the rise in the cost of living, but he also refused to rule out further support if energy bills were to rise by even more than expected in the autumn. Elsewhere, it is a quiet day for key economic news and data. In the US, latest trade balance data for April are expected to show a narrowing in the deficit. Already released US ‘goods’ trade data point to a considerable improvement in the overall deficit on a monthly basis. Imports of goods fell by 5%, which may be a China lockdown effect, while export growth also slowed. Meanwhile, the results of the Eurozone Sentix investor confidence survey for June are expected to show an improvement from -22.6 to -21.2 reflecting the recent stabilisation in equity markets in recent weeks following the selloff across April and most of May.
MARKETS
Global bond yields have risen noticeably since the start of the week, with 10-yr US Treasury yields now back above the 3% mark. The US dollar has also regained some of its vigour, pushing GBP/USD back below 1.25 and EUR/USD below 1.07.
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