China Cuts Rates
Risk appetite remained supported in the European session and received a boost when China cut its benchmark deposit rate by 25bp, the first move on benchmark policy since July of last year and the first rate cut since 2008. Risk assets will likely rally further as it can be seen that further monetary stimulus could be forthcoming but it may also be a sign that upcoming data will be soft. A successful Spanish bond auction eased some immediate investor concerns, though ranges were fairly tight with structural concerns deeply embedded in investor mindsets. SNB’s foreign currency reserves rose to 303.8 bn in May from 237.6 bn (revised) last. The SNB also confirmed that the majority of this rise was due to FX intervention. Sterling caught a bid from an unchanged services PMI (53.3 vs 52.4 consensus). As expected, the BoE left its asset purchase program unchanged in May. Five out of 42 Bloomberg-surveyed economists were looking for +£50 bn QE, so market consensus is still overwhelmingly for no change in policy and sterling’s reaction to the announcement was therefore fairly muted. AUDUSD continued its move higher after a strong employment report. 38.9k jobs were added in May (0.0 cons). This marks the 3rd consecutive monthly print above consensus and the first 3-month jobs gain in over a year. Importantly, the gains were driven by full-time positions (+46k). UBS economics believes the improving trend is likely to keep the RBA on hold, at least until the next CPI print, absent a global crisis. Ahead of Bernanke’s testimony. FOMC Vice-Chair Yellen sounded notably dovish, saying recent economic data leaves scope for more easing. The San Francisco Fed’s Williams said the Fed must stand ready to do even more if needed. A downgraded economic assessment might be served up by the Chairman, but our US economics team does not foresee any further Fed easing this month.
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