Taper tenacity

Following its policy meeting this morning, the Reserve Bank of Australia blew away the analysts and commentators who had expected it to back away from its earlier decision to scale down – “taper” – the quantitative easing programme. The RBA stuck to its guns and the AUD jumped a third of a US cent higher.

There had been a broad assumption that the RBA would feel obliged to make a U-turn on last month’s decision to slow the pace of bond purchases to $4 billion a week in September. The argument was that new Covid outbreaks would have a dampening effect on the Australian economy, which the RBA could not ignore.

But that was not how it turned out. In its statement, the central bank said it would keep the Cash Rate at 0.1% and “continue to purchase government securities at the rate of $5 billion a week until early September and then $4 billion a week until at least mid-November”. The statement pointed out that the economy bounces back quickly after an outbreak has been contained, and reiterated that it “remains committed to maintaining highly accommodative monetary conditions”. The unspoken implication was that does not mean more accommodative monetary conditions.

PMI pessimism

It is in the nature of financial markets to make the most of the unusual or unexpected. They did a fine job of that yesterday when ISM published its purchasing managers’ index for the US manufacturing sector. At 59.5 it was below 60 for the first time in six months and investors affected disappointment.

In doing so, they conveniently ignored the equivalent reading from Markit, which compares directly with most European measures, and had already come in at a record high of 63.4. However, the Markit measure has only been around since 2007; the ISM series began in 1948, so therefore claims seniority. The data did not affect the US dollar directly, but they prompted a brief rush for the safe-havens. It did not carry through: the antipodean dollars were the day’s top performers, with the JPY not far behind, while the USD, EUR, CHF and GBP were flat against one another.

Like America’s ISM, Switzerland’s SVME index has a slightly different methodology from the Markit model, so is not directly comparable to, say, Britain’s 60.4 or the Eurozone’s 62.8. That said, it is still worth noting that it came in at a record high of 71.1. The only other ecostat on Monday was US construction spending, which was up by 0.1% on the month.

NZ jobs

Investors will have one eye on the Reserve Bank of Australia’s recent action when they examine the quarterly New Zealand jobs figures tonight. The Reserve Bank of New Zealand’s next monetary policy meeting is a fortnight away, and good numbers might stimulate its appetite for a slightly tighter stance.

Most of the important action in the next 24 hours will take place tonight. As well as NZ employment, there will be PMIs for Australian construction, and services in Australia, Japan and China. Australia also reports on June’s retail sales. 

Ahead of those, Australia has already reported a third successive monthly fall for building permits and there are data this morning for Spanish employment and Eurozone producer prices. After lunch come Canada’s manufacturing PMI and US factory orders.