US recovery in doubt as ISM data takes a south-bound turn
While we may not have seen political jousting over the fiscal cliff manifest negatively for equity markets in recent weeks, leading data on the health of US manufacturing overnight highlighted the negative effects 'cliff' concerns are having on US corporates. The ISM manufacturing gauge slipped back into contraction territory in November, falling to 49.5 from a previous 51.7. Economist's estimates showed a moderate decline to 51.4 was expected. The employment subcomponent of the index registered 48.4 from 52.1 in October, notably the first contraction from the index after 37 consecutive months of growth. The employment index is considered a timely indicator ahead of Friday's official jobs report. The report by the Institute for Supply Management, valued for its comprehensive insight into manufacturing demand, highlights the fragility of the US recovery. It's apparent these ongoing concerns surrounding the US fiscal cliff have manifested negatively in the latest ISM print, suggesting businesses are gearing up for what could mark a significant downturn in the US economy should President Obama and his republican counterparts fail to reach a consensus over tax increases and spending cuts by year end.
Debt buy back inspires Euro upside
Across the Atlantic, European markets had earlier recorded moderate gains as markets eyed tentative signs of stability in Greece and stronger data points from China. The Euro lifted beyond the $US1.30 region after Greece offered to buy back government debt at a premium to current market pricing. In an effort to reduce their private creditor debt burden, the Public Debt Management Agency offered a maximum purchase price of 34.1 percent for bonds maturing between 2023 and 2042, with the tender to be concluded by December 7. Markets were suitability encouraged by the buy back and the Euro managed to claw back into the $US1.30-handle, reaching fresh six-week highs $US1.3076. Still, questions over Greece's ability to reduce their debt burden enough to satisfy bond markets and adhere to deficit targets remains a significant concern. Last week Greece struck a deal with the troika to reduce their overall debt to GDP ratio to 124 percent by 2020, using a mix of interest rate concessions, a return of profits from the ECB on previous purchases of Greek debt, and a buy-back of government debt.
Also in the frame overnight was a formal request from Spain for capital needed to bailout its ailing banking sector. Spain request 39.5 bln euro's to recapitalise struggling banks, but stopped short of making a request for sovereign aid.
A$ capped on rates conjecture; RBA rate cut a near certainty
The Aussie dollar slid yesterday after domestic data releases saw investors price in a greater chance of a rate cut, with retail sales and ANZ job ads showing weaker than expected activity. According to interbank cash rate futures, a rate cut at today's RBA policy meeting is a near certainty, with a 92 percent chance Stevens and Co will slice 25bps off the official cash rate - equaling the all time low of 3-percent set in April of 2009.
Other data yesterday showed company operating profits fell 2.9 percent in the third-quarter, while a 1.1 percent rise in inventories suggests subdued demand. The Australian dollar fell below 104-figure in the ensuing period, but regained composure after China's official services index and the HSBC manufacturing PMI allayed China slowdown fears.
While a rate cut today will encourage further weakness from the Aussie dollar, we anticipate selling to be limited in duration and scope given markets have suitably priced in a full 25bps cut at today's meeting. The following statement will however be the defining factor as markets look for the reasoning behind the decision and implications for future policy. An initial move below 104 US cents may see a descent slowed at 103.75, while further pockets of support suggest further downside to be contained above 103.5 US cents.
In the unlikely event the RBA stands pat, we're likely to see the statement maintain a dovish bias, therefore limited the upside scope for the local unit. For this we anticipate selling pressure ahead of 105-figure to contain the upside.