Markets meander, as Aussies traders turn to RBA Minutes

Overnight trade positive, but low-octane

Stocks were generally higher on Wall Street, led by the S&P 500; US Treasury yields ticked-up, especially at the front end of the curve; and commodities were, on balance, lower courtesy of another retracement in oil prices. Though overall one might suggest it was a day of slightly greater optimism, action within markets was a touch lighter than usual, bringing about what was a meandering 24-hours of trade. The cause of this early-week malaise is entirely comprehensible: market participants are currently operating within something of a vacuum, as they await a series of high-impact events this week.

ASX set for a middling start

The lukewarm trading conditions look set to rub-off on the ASX 200 this morning, with SPI Futures indicating that the index ought to open around 4 points higher today. Apparently, the positive day on Wall Street means little to investors, perhaps considering US stocks have more-or-less range trade for several days. Arguably the key headline for Australian market participants this morning is another bearish milestone for the Australian Dollar: it made another new low overnight, touching 0.6849 in US trade, primarily as-a-result of a general safe-haven play into the EUR, USD and JPY ahead of the risk laden week this week.

RBA Minutes in focus

Australian market participants get to peruse the devil in the details of the Australian economy today – or at least, the Australian economy through the eyes of the Reserve Bank of Australia. The RBA releases its monetary policy minutes this afternoon, with overriding question on the market’s mind: when will they cut interest rates next? It’s a piece of folksy wisdom doing the rounds at-the-moment that rate cuts rarely come as “one-and-done”. Hence, with at least one cut down for this cycle, traders will be shuffling around today’s release – positioning then repositioning for when that next rate cut will occur.

RBA rates bets

As it presently stands, the market is pricing-in a rate-cut from the RBA by August at the latest, with another cut almost entirely priced-in, after that, by December. More crucially in the short-term, and around today’s release of the RBA’s minutes, however, is what the market believes the RBA has in store next month. Market participants currently consider a cut at next month’s RBA meeting a fifty-fifty proposition. As such, the risk around today’s release of the RBA’s minutes is in the market pricing-in, or pricing-out, the interest cuts already baked into the market for next month’s meeting.

What will markets look for from the RBA?

How that dynamic plays out depends-on, as it always does, the perennial issue of whether the RBA is more “dovish” or more “hawkish” than expected. Remember: the key concept for the RBA, which anchors all its decisions right now, is that of “spare-capacity”, especially as it relates to the labour market. Specifically: how much of it exists, and where do interest rates have to be to see it absorbed? The RBA have already implied in their modelling that this would be at around 1%, at least, with the market now to judge whether such an assumption is too conservative, or on the money.

AUD and rates reaction to tell the story

The reaction in Aussie rates markets and the Australian Dollar will naturally be the guide here. Though they climbed yesterday in-line with their US counterparts, Australian Government Bond yields remain in a downtrend, as markets position for a softer Australian economic outlook. The relative un-attractiveness of Australian government bonds has increased the downward pressure on the Australian Dollar, which remains mired in an apparently inexorable down-trend, itself. Though a trend reversal is incredibly unlikely to be forthcoming today, a hawkish-or-dovish surprise from the RBA today could bring about a little pop in the Aussie-Dollar – to the upside or downside.

ASX also to remain sensitive to rate expectations

An extension of that, for the ASX 200, is what impact any adjustment in discount rates has on the stock market. The ASX more-or-less meandered yesterday, likely in the face of the myriad of event-risks confronting investors in the week ahead. General market internals conveyed an overall sluggish in trade yesterday: breadth was a modest 21%, with a bounce in the banks, courtesy of slightly higher global interest rates, the only meaningful gainer. Indeed, it’s a subdued market at-present; however, the price action, for now, points more to a market that is consolidating, rather than outright pulling-back, just for now.