Markets on smooth highs as RBA sticks to message

Share Markets: 

European equity markets sold off but remained near three month highs; there were no obvious drivers apart from some earnings results and the events in Ukraine.

In the US, the Nasdaq gained 0.5% while the Dow and the S&P500 both edged 0.2% higher. The FTSE100 was down 0.4% and the Dax fell 0.3%.


US 2 year treasury bond yields were constrained between 0.38% and 0.39%, mindful of Yellen's slightly dovish testimony last week.

10 year yields, in contrast, rose from 2.59% to 2.62% given the relatively stable risk environment. Australian 3 year government bond yields (implied by futures) were stable between 2.84% and 2.87%. 

The 10 year yield similarly ranged between 3.80% and 3.84%. 

Foreign Exchange: 

The US dollar index recovered further. EUR fell for a second consecutive day, from 1.3840 to 1.3745, weighed down by Draghi's hints on Thursday of stimulus to come in June.

USD/JPY edged higher from 101.65 to 101.86. The AUD moved a touch lower against the USD.


Gold and oil were marginally weaker while copper gained a little. With no major economic news, prices were relatively stable.


In the RBA's quarterly Statement on Monetary Policy, the central message from the Reserve Bank was essentially unchanged - that interest rates are expected to be kept on hold for months to come.

The RBA upgraded its near-term growth forecasts reflecting stronger consumption and dwelling investment.

Another positive surprise for the RBA appears to be developments in the labour market.

The central bank's commentary was more relaxed about the inflation outlook and refers to a degree of "spare capacity" being present within the economy.

The exchange rate was seen as a source of uncertainty. The RBA continued to expect the terms of trade to decline further, therefore suggesting a lower exchange rate over time.

We believe that the Australian economy is managing the transition away from mining investment to other parts of the economy reasonably well, and would justify the beginnings of policy normalisation towards the end of this year. 

The RBA's comments today leave us comfortable with this view, although next week's Federal Budget presents a key risk to the outlook. 


Chinese consumer prices edged down from an annual rate of 2.4% to 1.8% in the year to April. Falling food prices was largely behind the easing rate of inflation.

Other price data was also weak. Producer prices remained in decline, falling 2.0% in the year to April.

The annual rate has been in decline since early 2012. Subdued inflation leaves policy makers room for stimulus.


German exports fell 1.8% in March on top of a 1.3% decline in February. Germany's trade surplus has widened from €15bn in January to just over €16bn in February and March.        

United Kingdom:

UK industrial production fell 0.1% in March but the narrower factory output category rose 0.5%.

The factory sector was up for a fourth straight month, its longest positive unbroken run since 2010.

Growth in factory output over the year was 3.3%. Meanwhile the UK trade deficit narrowed a little to £8.5bn, as exports gained 4.9% against a 2.7% imports rise.

Construction output slipped 1.0%, which along with February's 2.0% decline, more than erased the 2.1% gain in January.

United States:

US wholesale inventories rose 1.1% in March, their fastest rise since October, led by durables and gasoline.