Early Morning Call: AUD jumps as RBA hikes cash rate to 4.1%

Indices overview

US equity markets ended the session lower on Monday evening. The S&P 500 was up in the first part of the day and the market hoped the index would end the day in bull market territory.

In APAC, indices mostly rose. Australia’s S&P/ASX 200 lost ground as Australia's central bank unexpectedly raised interest rates by a quarter point, taking the cash rate to 4.1%. A Reuters survey published last Friday said economists expected the Reserve Bank of Australia (RBA) to stay put, forecasting the cash rate to reach 4.1% only by end of the third quarter (Q3).

A hawkish RBA added in its statement that some further tightening could be required to tame inflation, currently pointing at 7% year-on-year (YoY).

The labour market also remains tight: the unemployment rate is at its lowest point in nearly half a century. The reaction of the Australian dollar was instantaneous. The currency jumped to a two-week high against the greenback, a four month high against the New Zealand dollar, and a six month high against the yen.

Macroeconomics

British retail sales unexpectedly slowed in May to a seventh-month low, according to the British Retail Consortium (BRC). Spending at BRC's members' stores rose 3.9% year-on-year, below the 5.2% recorded in April. The actual reading also missed an estimate of 5.2%.

This weak consumption trend is unlikely to change in coming months according to the BRC Cchief executive, Helen Dickinson. Food was the only area where consumers spent more last month, because of two bank holidays and the long weekend of King Charles' Coronation.

Shoppers reined in spending on non-essential items. The latest official figures revealed that food price inflation remained near a 46-year high at 19.1% and show little sign of coming down in the near future. This gives ammunition to the Bank of England (BoE) to continue to tighten.

The Bank of England reiterated it will keep raising interest rates if inflation looks persistent. The bank is expected to increase to 4.75% from 4.5% at its next meeting on June 22, the market currently sees interest rates peaking at 5.5% later this year.

In Germany, factory orders fell by 0.4% in April month-on-month (MoM), after -10.7% in March. Economists had anticipated a 3% rise. Retail sales in the eurozone are expected to increase by 0.2% in April MoM after a 1.2% drop in March.

Apple

Apple unveiled at its annual developer conference yesterday what CEO Tim Cook called "the first Apple product you look through, not at". Called the Vision Pro, it is a new virtual reality headset, that investors already see as the group's riskiest bet since the introduction of the iPhone. Why? First because of its price. Starting at $3,499, it's more than three times the cost of the priciest of its competitors, the Meta Quest Pro. Risky also because Apple enters a market that is crowded with devices that are struggling to gain traction with consumers.

Currently, the virtual reality market is dominated by Meta, which controls about 80% of the market, and many see this latest Apple venture as the next episode of years of clashes between the two companies. Apple said it has been working with Adobe and Microsoft to put their apps on the new headset. Set for release early next year in the US, owners will also have access to Disney+ streaming service and Apple TV+.

Besides the headset, Apple unveiled a new 15-inch MacBook Air and a powerful chip called M2 Ultra. It hardly excited investors though. The stock set a new all-time high ahead of the launch but ended the session down on the IG platform.