Aussies leave interest rates unchanged

OVERNIGHT

Asia-Pacific stock market performance is mixed this morning, but no indices are showing major changes. The Australian central bank left interest rates unchanged at its latest monetary policy update. It was noted that some further tightening may be required depending upon how the economy and inflation evolve and that the decision gave the Board more time to assess developments. 

THE DAY AHEAD

There are no significant data releases in either the UK or the Eurozone today, while US markets are closed for the Independence Day holiday. That means today’s economics calendar is extremely light. Indeed, the June Canadian manufacturing PMI is the only release of any real note. 

The Bank of Canada will make its latest monetary policy update next week and markets are looking for clues on whether it will hike interest rates again after the surprise increase in June. However, yesterday’s June PMI readings across several economic areas, including China, Europe and the US, all showed manufacturing activity is stagnant or falling across the world. Consequently, even if the Canadian measure slows by a similar amount, that may tell us little about whether domestic inflationary pressures are easing by enough to avoid further interest rate rises. Currently market expectations put about a 52% probability on another rate hike next week.

While today’s calendar is very quiet, the rest of the week will be busier particularly in the US. In light of recent comments from Federal Reserve Chair Powell and other Fed officials, markets now see close to an 85% probability of another interest rate hike on 26th July. Certainly, the implication of those comments is that upcoming data ahead of that update will need to provide some convincing indications that inflationary pressures are easing if a hike is to be avoided. In that light, both Thursday’s ISM services survey and Friday’s labour market report both look to be key indicators.

Early Wednesday, China’s Caixin services PMI may provide  further evidence whether the pace of the rebound in activity since Covid restrictions were removed earlier this year is slowing. A number of releases have disappointed of late but those where the slowdown seems most marked are ones most closely tied to global trends, notably manufacturing. In contrast the Caixin service measure surprised on the upside in May and so it will be interesting to see if it does so again in June. 

MARKETS

In thin pre-holiday, US Treasury bond yields eventually finished up yesterday as concerns about further interest rate hikes continued to impact on markets. UK gilt yields also finished up on the day as speculation continued about the possibility of another UK rate hike in August. In currency markets, sterling slipped against both the US dollar and the euro yesterday but has rebounded versus the latter overnight.