Perverse Reaction of Australian Financials After First RBA Rate Cut Since November 2020
February 18, 2025
The Reserve Bank of Australia’s Official Cash Rate has been cut by 25 basis points to 4.1% after being held at a peak of 4.35% since November 2023. The reduction size met analyst expectations but was accompanied by a statement with loads of cautionary rhetoric and assertions that a restrictive stance is still needed.
In reaction, the 10-year Australian sovereign debt yield climbed five basis points, the economy’s stock market dropped 0.7% and the Aussie dollar fell 0.2% against the U.S. dollar but climbed 0.5% versus New Zealand’s kiwi a day before the Reserve Bank of New Zealand is widely expected to announce a cut in its policy interest rate.
In other overnight market action, the dollar advanced 0.7% relative to the kiwi, 0.3% vis-a-vis sterling and the euro, 0.2% versus the yen, and 0.1% against the Canadian dollar, Swiss franc and Mexican peso. Ten-year sovereign debt yields increased by four basis points in Japan, three bps in the United States, two bps in Great Britain and a basis point in Germany where voters will be electing a new parliament five days from now. Prices for gold, WTI oil and Bitcoin have so far today risen 1.1%, 0.7% and 0.4%. Equity markets closed down 0.9% in China but up by 0.7% in Taiwan, 0.6% in South Korea and Indonesia, 0.5% in Singapore and 0.3% in Japan.
Three high Federal Reserve officials spoke overnight — Waller, Bowman and Harker — and each expressed full satisfaction with the pause in central bank rate cutting at what is considered a still-restrictive level. The U.S. economy is in a good place, and the labor market shows resilience. Disinflation has plateaued above target, and while they expect an eventual move back to target, it’s prudent to keep rates paused until evidence emerges of more disinflation. Non-monetary U.S. economic policies are undergoing recalibration, but they intend to react to what happens and not preempt what they think might happen.
The latest monthly batch of British labor market data include a larger-than-forecast 22k rise in jobless claims last month; an unchanged and lower-than-forecast 4.4% unemployment last quarter; a rise in average hourly earnings to a 13-month overall high of 6.0% and an 8-month high in regular pay growth of 5.9%; and a fourth-quarter 0.7% increase in labor productivity following an upwardly revised 1.1% drop during the third quarter of 2024.
The ZEW Institutes monthly investor surveys of Germany and Euroland have been released. In Germany’s case, expectations jumped to a February reading of 26.0 from 10.3 in January and as low as 3.6 back in September. February’s score was at a 7-month high, and the incremental improvement from January was the largest month-to-month rise in 13 months. But the accompanying -88.5 index for perceived current conditions in Germany remained quite weak. Investors are hopeful that whatever government coalition emerges from Sunday’s election is bound to be less dysfunctional than the present one, and they also anticipate a series of further ECB interest rate cuts. Regarding the whole euro area, the ZEW expectations index improved 6.2 points to a 7-month high of 24.3 and was accompanied by a 3-month high current situation index of -45.3 in February versus -33.8 in the prior month. Also, the index of consumer price expectations moved deeper into negative territory, printing at -18.6.
French consumer price inflation last month was revised upward to 1.7%, a 5-month high, from 1.4% reported initially. Swedish CPI inflation for January got revised lower to 0.9%, which is just 0.1 percentage point above December’s 4-month low. Following eight straight months of Portuguese producer price inflation above zero percent, such swung to -0.3% in January. Portuguese PPI inflation earlier had dropped from 22.4% in mid-2022 all the way to -4.3% in November 2023.
Swiss industrial production experienced its worst quarter since the winter of 2023, dropping 0.8% in 4Q 2024, but still managed to be 2.3% above the level one year earlier.
Canadian consumer price inflation, which has ranged between 1.6% and 2.0% over the past six reported months, ticked up 0.1 percentage point to an as-expected 1.9% in January, but measures of core inflation remained somewhat above 2.0%.
The Empire State manufacturing index rebounded to +5.7 in February from January’s divot of -12.6 but still remained some distance shy of November’s +20.2 reading.
Regarding the aforementioned Australian central bank interest rate cut, the nuanced statement opines, “In removing a little of the policy restrictiveness in its decision today, the Board acknowledges that progress has been made but is cautious about the outlook. a range of indicators suggest that labor market conditions remain tight and, in fact, tightened a little further in late 2024. There are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slow growth in the economy and weak productivity outcomes while conditions in the labor market remain tight. Market expectations for further easing have moderated somewhat in recent months, particularly in the United States.” Today’s Reserve Bank of Australia interest rate decision coincided with publication of the quarterly Monetary Policy Statement, where more detailed insight into the latest thinking of officials can be found.
Copyright 2025, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: British labor market data, Euroland and German ZEW expectations index, Reserve Bank of Australia
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