The equity markets continued to grind higher, moving into the black for 2010, while oil rebounded and the Euro edged higher against the dollar. For the session, the S&P 500 Index climb 2.6 points to 1118.
The RBA pursued its rate normalization process and hiked interest rates by another 25bp overnight (to 4%, bringing the cumulative tightening of monetary policy to 100basis points). The RBA is probably not done yet on the rate hike front, but the central bank will remain cautious in its policy actions and there was nothing in the statement suggesting that another rate rise is likely in April, with Governor Stevens just reiterating that rates should move closer to ‘average’. Additional other news that was bullish for the AUD was January retail sales were reported at a stronger than expected +1.2% m/m and offsetting a 0.9% m/m decline previously.
The Bank of Canada took a more hawkish stance boosting the Canadian dollar. While the target overnight rate was left unchanged at 0.25% as expected, the central bank indicated that inflation risks were no longer tilted to the downside and that core inflation has been slightly firmer than projected. The BoC acknowledged that Canadian economic activity has been higher than it had projected in the January MPR. That said, the BoC reiterated the target overnight rate would remain at current levels until the end of Q210. The bottom line is that the BoC is likely to hike ahead of most other major central banks including the Federal reserve.
Yesterday’s Q4GDP for Canada was reported at a much stronger than expected 5% annualized, the strongest reading since Q32000 and with the strength in consumer spending confirming improving domestic demand. Inflation remains well anchored for now, but it has risen from last year’s low (January reading at 1.9% y/y, up from 1.3% in December 2009).
Japanese equities has benefited to from encouraging employment data released today. The January unemployment rate fell to 4.9% from 5.2%. The consensus was for 5.1%. The job-to-applicant ratio was unchanged, at 0.46. While the data are encouraging and suggest that the improvement in the export sector may be encouraging hiring, that has not yet translated into spending. Unfortunately January household spending figures out overnight were reported at a weaker than expected 1.7% y/y (from 2.1%).
The rating agency Fitch has warned that the UK is the most vulnerable of the AAA rated countries to the financial crisis and should trim its budget deficit more sharply in the next four years. While the news is weighing on the pound, and it could signal that Fitch may shift its outlook (currently stable), it would not be the first rating agency to do so. S&P, which also rates the UK at AAA along with Moody’s (Moody’s Aaa is equivalent to AAA) has already put the UK on negative watch in May 2009
