RBA keeps rates unchanged but maintain a hawkish attitude

Economic news out of the US on Monday was hawkish for Fed policy and bullish for the dollar. The January ISM services index rose by 2.9 to a 4-month high of 53.4, exceeding expectations of 52.0. In addition, the January ISM services price sub-index unexpectedly rose by 7.3 to an 11-month high of 64.0, stronger than expectations of a decline to 56.7. Chicago Fed President Goolsbee said yesterday that he needs to see more data showing inflation progress before the Fed starts cutting interest rates.

Minneapolis Fed President Kashkari said the neutral rate will probably rise. That would give the FOMC time to assess upcoming economic data before it starts cutting the federal funds rate, with less risk that too tight a policy would derail the economic recovery.

The PPI report (shows the rate of inflation between factories and plants) in the Eurozone proved to be a dovish factor for ECB policy. ECB Governing Council spokesman Vujcic said that the ECB now needs to be patient before embarking on an easing cycle to make sure that labor costs do not turn into sustained wage pressures.

The Eurozone Producer Price Index for December fell by 10.6% y/y, weaker than expectations of 10.5% y/y. The Sentix Eurozone Investor Confidence Index for February rose by 2.9 to a 10-month high of negative 12.9, stronger than expectations of negative 15.0. German trade data came in below expectations as exports for December fell by 4.6% m/m, weaker than expectations of 2.8% m/m and the biggest decline in a year. Imports for December fell by 6.7% m/m, which was weaker than expectations of 1.9% m/m and was the biggest decline of the year. Swaps estimate the odds of a 25 bps ECB rate cut at 13% at the next meeting on March 7 and 68% at the April 11 meeting.

WTI crude futures rose to around $73 a barrel on Tuesday, extending gains from the previous session amid concerns about escalating tensions in the Middle East that could disrupt oil supplies from the region. Analysts pointed to a series of US strikes against Iranian-backed militias over the weekend, although US officials emphasized that the country was not seeking a wider conflict in the region.

Asian markets traded mixed on Monday. Japan’s Nikkei 225 (JP225) decreased by 0.24% for the day, China’s FTSE China A50 (CHA50) jumped by 1.54%, Hong Kong’s Hang Seng (HK50) closed Monday at its opening price, and Australia’s ASX 200 (AU200) ended the day negative 0.85%. Hong Kong and Chinese stocks rose sharply on Tuesday opening as authorities introduced measures to maintain market stability and halt a sharp sell-off in equities.

The Australian dollar rose to around $0.65, rebounding slightly from 11-week lows after the Reserve Bank of Australia (RBA) left interest rates unchanged as expected but warned that further interest rate hikes were possible due to persistently high inflation. The RBA acknowledged that inflation fell more than expected in the fourth quarter but was undecided on when inflation would return to the 2-3% target. Policymakers added that the path of interest rates will depend on data and the evolving assessment of risks.