Markets Overview

  • ASX SPI 200 futures down 0.6% to 7,228.00
  • Dow Average down 1.1% to 33,684.53
  • Aussie up 0.5% to 0.6663 per US$
  • U.S. 10-year yield fell 14.3bps to 3.4239%
  • Australia 3-year bond yield rose 18 bps to 3.19%
  • Australia 10-year bond yield rose 9.3 bps to 3.44%
  • Gold spot up 1.7% to $2,016.66
  • Brent futures down 5.1% to $75.26/bbl

Economic Events

  • 09:00: (AU) April Judo Bank Australia PMI Servic, prior 52.6
  • 09:00: (AU) April Judo Bank Australia PMI Compos, prior 52.2
  • 11:00: (AU) Australia to Sell A$800 Million 4.5% 2033 Bonds
  • 11:30: (AU) March Retail Sales MoM, est. 0.2%, prior 0.2%
  • 14:55: (AU) RBA’s Kohler-Speech

Just a day after Wall Street breathed a sigh of relief with the rescue of First Republic Bank, a selloff in US regional lenders fueled renewed anxiety over financial stability, sinking stocks across the board and spurring a flight to the safest corners of the market.

For many traders, the timing couldn’t be worse.

On the eve of the Federal Reserve decision, multiple volatility halts in PacWest Bancorp and Western Alliance Bancorp were seen as disturbing. Both shares were down at least 15%. The financial industry weighed heavily on the S&P 500, which sank almost 2% at one point before trimming losses.

Bearish hedge-fund traders were present in the bout of selling that erupted Tuesday and later prompted long-only investors to sell too, according to a note from John Flood, a partner at Goldman Sachs Group Inc.

“Wall Street is quickly hitting the sell button as banking turmoil appears it is not going away anytime soon,” said Ed Moya, senior market analyst at Oanda. “Risk appetite did not stand a chance as traders focused on lingering doubts over the regional banks, rising recession odds, and growing risks that the US could default on its debt next month.”

All of these factors combined are only deepening a sense of uneasiness among investors about the Fed’s conundrum.

In addition to the financial strains stemming from bank failures, officials remain caught between stubbornly high inflation and data pointing to an economic downturn — such as Tuesday’s JOLTS record of job openings that fell to lowest in nearly two years.

To make matters worse, there’s brewing angst over the US debt ceiling — which only adds to the whole discussion on whether the Fed should pause after hiking in May to prevent a more severe economic recession.

While swaps are still pricing in a quarter-point Fed rate increase on Wednesday, traders trimmed their bets on a subsequent hike — while amping up wagers on cuts before the year is over.

With all those elements in play, it shouldn’t come as a surprise that bonds got heavily bid Tuesday — especially after the selloff of the previous session. Two-year rates, which are more sensitive to imminent Fed moves, plunged as much as 21 basis points to below 4%.

Meantime, Treasury bill yields for June topped 5% in the wake of a warning from Janet Yellen that the US government could run into debt-ceiling limitations as soon as the start of next month.

Other News

Australia’s central bank signaled further policy tightening ahead after unexpectedly raising interest rates by a quarter-percentage point on Tuesday, sending the currency and bond yields surging.

The Reserve Bank increased its cash rate to 3.85%, the highest level since April 2012, in a decision predicted by only nine of 30 economists. Money markets rapidly revised up expectations for further moves and are now pricing in a rate of just under 4% by October, from around 3.6% before today’s decision.

The unexpected hike from a pause in April comes shortly after an independent review of the RBA recommended overhauling the current board set up and strengthening its communications. Treasurer Jim Chalmers is due in the next month or two to announce whether he will extend Governor Philip Lowe’s term or install someone new.

“The surprise hike suggests a shift in the RBA’s assessment of the tradeoff between growth and inflation,” said James McIntyre at Bloomberg Economics in Sydney. “An easing in offshore banking tensions and an upward revision to migration at home suggest greater comfort with downside growth risks.”

Australian government bonds slid after the decision as the prospect of higher rates curbed demand for government debt. The selloff pushed three-year yields 22 basis points higher, boosting the appeal of the Australian dollar, which strengthened more than 1%. The benchmark share index dropped 1.1% as higher borrowing costs may slow profit growth.

In a speech in Perth Tuesday evening, Lowe highlighted that services and energy price inflation remain high and are likely to stay so for some time. He also pointed to worrying signs of stickiness overseas in these sectors.

“It is possible that circumstances might be different here in Australia, but the experience abroad points to an upside risk, especially given the high degree of commonality across countries in inflation dynamics recently,” he said.

Responding to a question after the speech on whether the board was unanimous in its decision Tuesday, Lowe said it was a close call, but unlike April, this time it fell on the side of a hike.

“We reached a strong consensus that this was the right time to move again,” the governor said. “So both last month and this month our decisions were finely balanced but given the flow of data we came to a strong consensus it was time to move again.”

Even after today’s hike, Australia still lags global counterparts in its policy response to higher prices. It has raised rates by 3.75 percentage points, compared with 5 in New Zealand and 4.75 in the US.

Both the Federal Reserve and the European Central Bank are expected to raise rates again at meetings this week and New Zealand’s central bank is forecast to do so later this month.