Headlines

*The RBA lifts rates to 2.35%, more increases to come

*US dollar pauses broad rally, bulls still solidly positioned

*Sterling’s Truss boost may prove fleeting as growth fears weigh

*Stocks in Asia turn mixed, US equity futures rise

US equities were closed for Labor Day yesterday. The major averages capped their third consecutive week of losses. The MSCI world index fell for a seventh straight day. Defensives outperformed cyclicals in the sell-off that eased during the sessions. Markets are more positive today on renewed stimulus in China. European futures are marginally lower. US futures are currently in the green, with the Dow leading the way.

USD made another new cycle high at 110.27 before paring back and closing on its low at 109.60. EUR/USD dropped to a fresh 20-year low at 0.9877. It is modestly higher this morning, trying to regain parity. GBP snapped its losing six-day streak after falling to 1.1443. USD/JPY is powering higher today, pushing above 141 as the 10-year US Treasury yield holds 3.24%. AUD has slipped below 0.68 after the expected RBA rate hike.

Event Takeaway – RBA signals more to come

The RBA hiked rates by 50bps in line with expectations. There were no new economic forecasts. Policymakers noted that the outlook for the domestic economy has turned even more negative. Higher rates may impact consumer spending which remains a key variable. But wage growth is picking up in some sectors.

The bank expects more tightening further out but said it is not on a pre-set path. Data-dependency is the key word these days, especially as rates are near “neutral”. That means a greater chance that rates may now continue to be raised at a slower pace. We note that the RBA meets monthly, unlike other major central banks. There was little major impact on markets with the aussie pushing higher immediately after the announcement. It has now given back those gains through the morning session. China’s outlook remains key for AUD.

Chart of the Day – GBP rallies off the lows

The pound has enjoyed a relief rally as the new PM, Liz Truss drafts her response to the energy crisis shrouding the UK. A whopping £130bn plan over the next 18 months to keep UK energy bills below £2k is on the cards. This is a short-term positive as it protects household’s purchasing power. It also eases markets fears slightly about tax cuts adding to the inflation horror story. But it is still a recipe for ballooning fiscal deficits.

The Bank of England meet next week. Markets were pricing above a 70% chance of a 75bps rate hike. Some economists think caps on energy bills might trim inflation by around 4%. But tax cuts would argue for more policy tightening. The pandemic low at 1.1409 in GBP/USD was not breached as oversold conditions ease. Near-term trendline resistance sits around 1.1630. The mid-July low is 1.1759.