Early Morning Call: GBP slides after unemployment rate unexpectedly rises

RBA minutes

At its last meeting the Reserve Bank of Australia (RBA) decided to hike its cash rate by 25 basis points to 3.85%, an unexpected decision the bank justified by persistent high inflation in the services sector and pressure from weak productivity growth.

The minutes of the RBA show that board members also considered a pause. "In weighing up the two options, members recognised that the arguments were finely balanced but judged it appropriate to increase interest rates at his meeting," the minutes said. "Members also agreed that further increases in interest rates may still be required, but that this would depend on how the economy and inflation evolve."

At the moment, markets are pricing an 85% chance of a pause in June, while seeing a higher risk of a hike in August or September. A consequence of the last RBA rate hike, Westpac consumer confidence took a hit in May. The index fell to 79, from 85.8 in April. In the statement accompanying the data, Westpac chief economist Bill Evans said "the two key developments over the last month have been the surprise decision by the Reserve Bank Board to lift the cash rate in May and the Federal Budget."

China recovery

Is Chinese economic recovery losing momentum? The latest set of macroeconomic data is certainly adding pressure on policymakers. Industrial production rose 5.6% in April year-on-year (YoY), accelerating from the 3.9% pace seen in March, but missing expectations of 10.9%.

Retail sales also accelerated in April. The index increased by 18.4% in April YoY after a 10.0% rise in March, also below expectations for 21%. Expectations seem high but they are skewed by heavy declines in April 2022 when major cities including Shanghai were placed under stringent Covid-19 lockdowns. Fixed asset investment increased by 4.7% in the first four months of the year compared to the same period in 2022, undershooting a consensus of 5.5%.

Investment in the property sector, a key pillar of the economy, tumbled 16.2% year-on-year last month after a 7.2% drop in March. What does it mean for interest rates? China's central bank kept the interest rate unchanged for an eighth straight month on Monday, but markets are now betting on more monetary easing in the coming months.

Macroeconomics

In the UK, the unemployment rate unexpectedly rose to 3.9% in March from 3.8% in February. The April claimant count rose to 46.700 from 26,500 the previous month.

The market awaits the second estimate of eurozone first quarter (Q1) gross domestic product (GDP) growth rate. Economists anticipate the euro area economy to have expanded by 0.1% quarter-on-quarter (QoQ).

Germany ZEW economic sentiment is forecast to fall for a third straight month to -5.5, which would set a new low for the year.

In the US, the market awaits retail sales for the month of April. Economists see a 0.7% rise month-on-month (MoM). Industrial production is expected to stay flat in April MoM, and NAHB housing market index is anticipated to remain at 45 in May.

Equities

New Vodafone boss Margherita Della Valle wants to cut 11,000 jobs over three years as the telecoms group "must change". Vodafone’s EBITDAAL fell 1.3% to €14.7 billion, while revenue rose 0.3%. The group forecasts little or no growth in earnings for the new financial year.

Imperial Brands reports a rise in half-yearly profit. Operating profit rose to £1.53Bln from £1.2 billion a year earlier. The dividend was up 1.5% to 43.18 pence and the tobacco firm says it is on track to complete its £1Bln share buyback programme.

Sales continue to grow at Greggs. Like-for-like sales rose 17.1% in the first 19 weeks of the year. Total sales reached €609 million, after €495Mln a year ago. Greggs kept its full-year guidance unchanged.

In the US, Home Depot will kickstart retailers’ earnings this week. The market expects a tough start of the year for the home improvement company. High inflation has forced consumers to restrict spending and favour essentials such as food and energy. As a result, more homeowners have chosen to delay renovation projects.

Earlier this year Home Depot warned it expected earnings to fall by a mid-digit percentage this year, and sales to be broadly flat. For the first three months of the year, analysts expect earnings to fall by around 7% to $3.87 per share. Revenue should come it at $38.60Bln, to be compared with $38.91Bln during the same quarter a year ago.