Australia’s central bank to get new rate-setting board under review shake up

SYDNEY, April 20 (Reuters) – Australia’s central bank is expected to get a new specialist board to manage monetary policy that will give independent expert members more responsibility for setting interest rates, a dilution of the bank’s traditional power over policy.

A 272-page review of the Reserve Bank of Australia (RBA) released on Thursday outlined a range of reforms from a more focused policy mandate, to fewer policy meetings and a separate board for the bank’s day-to-day operations.

Importantly for market confidence, the RBA’s new Monetary Policy Board (MPB) would retain its independence from government and its flexible inflation target of 2% to 3%.

It would have a simpler dual mandate of price stability and full employment, bringing it in line with most other major central banks, and aim to be more transparent on policy.

The current mandate is unusual among central banks in having a broad remit for the economic prosperity and welfare of the Australian people.

Treasurer Jim Chalmers indicated in-principle agreement to all 51 of the recommendations made by the review which he set up last July with an eye to making the RBA “fit for the future”.

“The recommendations in the report are about bolstering the independence of the Reserve Bank, not undermining that independence,” Chalmers said in a media conference.

The proposals follow intense scrutiny on the RBA and its chief for sharply hiking rates to fight runaway inflation. Similar criticisms have been levelled against many central banks over the effectiveness of policy communication to markets and the wider public.

RBA Governor Philip Lowe welcomed the review and said the current board would now consider how to implement some of the proposals. The full recommendations are due to be introduced by July next year.

Chief among these was that the RBA’s board be split into one for monetary policy and one for governance, which would have an external chair to oversee operations such as human resources, finance and technology.

POWER SHIFT

The MPB would comprise the governor and deputy governor of the RBA, the Treasury Secretary and six external members with expertise of macroeconomics, the financial system, labour markets and the supply side of the economy.

The current board also has six external members but they tend to be drawn from the business community and the review questioned whether they had enough expertise in economics.

The review recommended the MPB meet eight times a year, instead of the current 11, again more in line with international practice. An unattributable record of voting would be published for the first time, including any points of disagreement.

External members of the current board rarely speak in public and policy communication is the sole purview of the governor and deputy governor.

“It takes some power away from the governor, I think that’s probably the biggest change,” said Sean Callow, a senior currency strategist at Westpac. “It’s essentially been the governor who will tell us what the RBA’s view is.”

“So it would be very interesting if we have some external members who come in and make comments that are not so much in line with what the governor is saying.”

Lowe has come in for much criticism after telling borrowers in 2021 that interest rates were unlikely to rise until 2024.

Instead, inflation surged past expectations and forced the bank to start an aggressive tightening cycle in May last year, lifting rates by a total 350 basis points to 3.6%.

Lowe’s seven-year term ends in September and there is speculation it will not be extended as it was with his two predecessors.

Chalmers said a decision on Lowe’s appointment would be made in the middle of the year. Lowe himself told reporters he would accept another term if offered, but would understand if the government wanted someone else for the job.

(Reporting by Wayne Cole; Editing by Sam Holmes and Shri Navaratnam)

Low volatility propping up risk appetite

April 20 (Reuters) – Stocks may be treading water as investors digest a mixed flow of US earnings and red hot UK inflation is pushing up global bond yields, but investors in Asia with a glass half full outlook on Thursday might want to latch on Wall Street’s volatility.

Or rather, lack of it.

The VIX index, also known as Wall Street’s fear gauge, fell on Wednesday to its lowest point since November 2021, and is below the average of the last 5, 10, 15 and 20 years.

Indeed, at 16.41 when the market closed on Wednesday, the VIX is comfortably below the average of 19.7 since the index’s inception in 1990.

Maybe investors are so underweight and short equity they don’t need downside protection, or the market’s resilience – still up 8% this year and up 10% from last month’s banking shock low – has calmed the horses.

Either way, extremely low US volatility generally bodes well for other stock markets. Asian stocks ex-Japan and Hong Kong tech on Wednesday had their worst day in three weeks – could they be poised for a rebound Thursday?

On the other hand, Tesla shares slid after the bell on Wednesday after the company missed market estimates for first-quarter margin.

And worrying UK inflation figures may extend a dark shadow over Asia. Figures on Wednesday showed that Britain was the only country in western Europe with double-digit inflation in March, prompting several banks to raise their UK rate outlook.

UK money markets are pricing in a further 75 basis points of tightening this year, taking the base rate up to 5%. Former BoE policymaker Andrew Sentence told BBC radio rates might have get closer to 6% to defeat inflation.

This matters for the rest of the world because it is a stark reminder of how sticky inflation can be and a warning to central banks that have paused their hiking cycles – of which there are several in Asia – to guard against complacency.

The inflation focus turns to New Zealand and Malaysia on Thursday, and forecasts for both are not all that encouraging. Malaysia’s annual CPI inflation is only expected to slow a tenth of one percent to 3.6%, and New Zealand inflation in Q1 is expected to rise.

Meanwhile, Australia’s central bank governor Philip Lowe addresses the media on Thursday and India’s central bank releases the minutes of its last policy meeting.

China’s central bank announces its latest decision on one- and five-year loan prime rates, and figures from Japan are expected to show the trade deficit widened in March.

Here are three key developments that could provide more direction to markets on Thursday:

– Australia – RBA Governor Philip Lowe speaks

– India – RBI publishes meeting minutes

– China loan rate decision

(By Jamie McGeever)

Dow dips, S&P 500 stable after medtech gains, Netflix drag

April 19 (Reuters) – The S&P 500 ended virtually unchanged on Wednesday while the Dow dipped as investors digested a mixed bag of corporate earnings, including upbeat reports from medical technology companies, countered by weakness in Netflix shares.

The Dow was weighed down by declines in Walt Disney Co (DIS) and UnitedHealth Group Inc (UNH) shares following results from rivals in their respective industries.

Major equity indexes have been largely stable during the early stages of a first-quarter earnings season that investors expect to show tepid results.

“Corporate results are being seen as being in large part company-specific news versus market news,” said Art Hogan, chief market strategist at B Riley Wealth. “If that keeps us relatively calm and unchanged for now, while the sample set of reporters is still quite small, I think that’s a positive.”

The Dow Jones Industrial Average fell 79.62 points, or 0.23%, to 33,897.01; the S&P 500 lost 0.35 points, or 0.01%, at 4,154.52; and the Nasdaq Composite added 3.81 points, or 0.03%, at 12,157.23.

The defensive utilities group gained most among S&P 500 sectors, rising 0.8%.

The CBOE Volatility index, also known as Wall Street’s fear gauge, fell to its lowest point since November 2021 during the session.

Investors are looking for signs in corporate results that inflation may be driving up costs or hurting consumer spending, amid fears the economy may be on the cusp of a downturn.

S&P 500 companies overall are expected to post a 4.8% decline in first-quarter earnings from the year-earlier period, according to Refinitiv IBES.

“We seem stuck in this range, with those people who think that there is going to be a recession coming and those people who think there is going to be a soft landing,” said Rick Meckler, partner at Cherry Lane Investments.

Netflix Inc (NFLX) shares slid 3.2% after the video-streaming pioneer offered a lighter-than-expected forecast. Shares of streaming rival Disney slipped 2.2%.

Tesla Inc (TSLA) shares dropped 2% after the electric-vehicle maker’s sixth US price cut this year. Tesla shares slid further in initial after-market trading on Wednesday following the company’s quarterly report.

Shares of Elevance Health Inc (ELV) fell 5.3% after the insurer’s strong quarterly profit failed to ease investor concerns over regulatory hits to the company’s government-backed insurance business. UnitedHealth shares dropped 3.6%.

Elsewhere in healthcare, Abbott Laboratories ABT.N shares jumped 7.8% after the medical device maker said most delayed non-urgent medical procedures had resumed globally three years into the COVID-19 pandemic. Intuitive Surgical (ISRG) shares soared 10.9% after its quarterly revenue and profit topped estimates.

Shares of Western Alliance Bancorp (WAL) surged 24.1% after the company posted stronger-than-expected earnings, helping lift the SPDR S&P Regional Banking ETF 3.9%.

Regional banks have been in focus after the failure of Silicon Valley Bank last month prompted concerns about systemic risks.

Declining issues outnumbered advancers on the NYSE by a 1.28-to-1 ratio; on Nasdaq, a 1.11-to-1 ratio favored decliners.

The S&P 500 posted 16 new 52-week highs and one new low; the Nasdaq Composite recorded 59 new highs and 123 new lows.

About 10 billion shares changed hands in US exchanges, compared with the 10.6 billion daily average over the last 20 sessions.

(Reporting by Lewis Krauskopf in New York, Sruthi Shankar and Ankika Biswas in Bengaluru
Editing by Vinay Dwivedi and Richard Chang)

US recap: Dollar up but UK inflation helps sterling buck the trend

April 19 (Reuters) – The dollar index rose on Wednesday but came off its highs after meeting rejection at Monday’s peak while gains in 2-year Treasury-bund yields spreads topped out along with risk-off flows that had provided fuel earlier.

Above-forecast core inflation readings from the euro zone limited EUR/USD losses, while the UK’s well above forecast 10.1% March inflation pushed sterling broadly higher given the enormous delta between the BoE’s current 4.25% rate and inflation.

Sterling was left with gains of 0.12% after coming off its 1.24745 highs, with this week’s lows clustered near the rising 21-day moving average support.

EUR/USD rebounded from its lows by Tuesday and Monday’s lows, but was still down 0.18% in late trade.

USD/JPY hit fresh April highs by upper channel and Bolli band resistance, clearing the 61.8% Fibo of March’s slide at 134.75, but later retreated from its strongest levels of the day to stand 0.47% firmer on the day.

Rising Treasury-JGB yields spreads are underpinning USD/JPY as JGB yields are again being capped by the BoJ’s reaffirmed yield curve control policy.

Treasury yields are rising due to pricing out of rapid Fed rate cuts that markets projected during March’s banking crisis, and in response to US core inflation rising to 5.6% and the jobless rate falling to 3.5% in March.

Wednesday’s elevated European inflation readings also add to the sense that inflation is more tenacious than expected and will require rates, particularly from the ECB and BoE, to rise further and for longer. Yet the market is straining to price in more than one more 25bp Fed hike that is then followed by roughly 50bp of cuts by year-end.

Divergent central bank policy expectations leave the dollar index precariously perched above February and April’s 100.80/78 trend lows.

Thursday features US jobless claims, Philly Fed, existing home sales and leading indicators, all leaning toward a cooling economy per Wednesday’s beige book.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)

Gold slides as yields climb, doubts grow about Fed’s rate-hike pause

April 19 (Reuters) – Gold prices fell below the key USD 2,000 level on Wednesday as US yields marched higher, with investors turning sceptical about potential US rate cuts later this year.

Spot gold was down 0.5% at USD 1,994.02 per ounce by 1:40 p.m. ET (1740 GMT), having shed as much as 1.8% to a two-week low of USD 1,969.09 earlier in the session. US gold futures settled down 0.6% at USD 2,007.30.

“Once gold breached that USD 2,000 mark, there were a lot of stop losses that were triggered,” said Phillip Streible, chief market strategist at Blue Line Futures in Chicago.

“Anytime you get earnings, you get a lot of people chasing individual stocks and that could also cause them to not invest so much in metal.”

The dollar strengthened 0.2%, underpinned by US yields climbing to a near one-month high, with markets now pricing in an 85% chance of a 25-basis point rate hike at the Federal Reserve’s May 2-3 meeting, according to CME’s FedWatch tool.

St. Louis Fed chief James Bullard said on Tuesday that the US central bank should continue raising interest rates as recent data shows inflation remains persistent while the broader economy seems poised to continue growing, even if slowly.

A stronger dollar weighs on overseas demand for greenback-priced gold, while higher rates blunt non-yielding bullion’s appeal.

Rate-hike expectations for the (Fed’s) May meeting have risen, which has pressured gold back below USD 2,000, at least in the short term, said Standard Chartered analyst Suki Cooper.

Markets will scan more upcoming remarks by Fed officials this week, ahead of a blackout period that starts on April 22 before the central bank’s May meeting.

Silver rose 0.2% to USD 25.27 per ounce, platinum gained 0.7% to USD 1,089.73, while palladium was mostly flat at USD 1,608.47.

(Reporting by Deep Vakil in Bengaluru; Editing by Sherry Jacob-Phillips and Shounak Dasgupta)

GBP/USD clues from the FX options market

April 19 (Reuters) – Price action in forward looking FX options can provide clues on the outlook for a currency pair and there have been some notable changes in GBP/USD options of late.

Implied volatility is the option market gauge of actual volatility expectations when determining premium – Benchmark 1-3-month expiry is trading its lowest levels in a year by 8.0.

Risk reversals show the implied volatility premium for option strikes in one direction versus the other. They have seen their long standing GBP put/USD call (GBP/USD downside versus upside strike premium) fall to its lowest levels since September 2021.

GBP/USD option trade flows have been relatively light over recent sessions, but volatility sellers via various strikes and expiry dates are outweighing buyers.

This price action fits with a low GBP/USD volatility environment being maintained for now. It would suggest that there is less perceived risk of a substantial GBP/USD setback and there is certainly potential for more GBP/USD gains. However, the low implied volatility and lack of demand for topside strikes would suggest that any further GBP/USD gains are expected to remain a hard fought grind that lacks volatility.

Large impending 1.2450-1.2500 strike expiries can influence short term price action.

(Richard Pace is a Reuters market analyst. The views expressed are his own)

Stocks ease, dollar perks up as focus returns to Fed and inflation

LONDON/SINGAPORE, April 19 (Reuters) – Global stocks eased on Wednesday, while the dollar pulled further above last week’s one-year lows, as investor focus honed in on what the Federal Reserve may have to do to tame inflation, rather than on the recent problems in the US banking sector.

The MSCI All-World index fell 0.2%, thanks to a broad-based decline in equities around the world.

S&P 500 and Nasdaq 100 futures fell between 0.3-0.5%, suggesting a touch of weakness at the opening bell.

Tesla reports earnings later in the day, as does Morgan Stanley, on the heels of solid earnings at rivals that seem to have soothed some concern about the sector’s stability.

“So far the major banks that have reported have largely helped to settle market nerves,” said Khoon Goh, head of Asia research at ANZ in Singapore. “With those stresses easing away, markets are now back to focusing on the Fed.”

A slew of Fed speakers are in the frame over the rest of this week ahead of the pre-meeting blackout period that begins on the weekend.

The Fed’s “beige book” of economic conditions is published on Wednesday and appearances are due from Chicago Fed President Austan Goolsbee and New York Fed President John Williams.

Markets are pricing an 86% chance the Fed raises rates by 25 basis points (bps) at the May meeting, and are winding back expectations of cuts later in the year – moves that have put the brakes on US dollar selling.

In an interview with Reuters on Tuesday, St Louis Fed President James Bullard said that, far from pausing, the central bank should keep raising interest rates, based on how persistent inflation has proven to be.

Still, the inversion between three-month Treasury yields and 10-year yields, at more than 160 bps, is the deepest since 1981 when the Fed funds rate was retreating from peak of 19% – suggesting markets expect rates to fall.

Ten-year yields were last up 5 bps at 3.6176%.

Surface calm

Earnings seasons is underway in earnest in Europe too.

Dutch-listed chip equipment maker ASML – one of the region’s most valuable companies by market capitalisation – beat first-quarter profit expectations, according to Refinitiv data.

Shares in the company fell 2.4%, which in turn contributed to a 0.2% drop in the STOXX 600 index.

As investors consider the possibility that the Fed may well have to raise rates even more, the US dollar has found some support, but data shows the pressure is also on other central bankers to do something about inflation.

UK inflation fell to 10.1% in March, from February’s 10.4% – above expectations for a decline to 9.8% and the highest in western Europe, according to data on Wednesday.

Sterling was last up 0.3% at USD 1.2458, just below last week’s 10-month high of USD 1.2545, gaining for a second day after strong wages data on Tuesday.

“This fact, along with the stronger than expected wage growth data yesterday, provide compelling reason for the BoE (Bank of England) to now hike by 25bps at the next meeting on 11th May,” MUFG chief strategist Derek Halpenny said, on the inflation figures.

The euro hit a one-year high above USD 1.10 last week and was down 0.1% at USD 1.0962.

Brent crude LCOc1 futures eased 0.9% to USD 84.00 a barrel, roughly where they have traded for a few weeks since OPEC+ announced surprise production cuts. Gold dipped below USD 2,000 an ounce, given the strength in the dollar.

(Additional reporting by Tom Westbrook in Singapore; Editing by Jacqueline Wong and Mark Potter)

Euro zone yields hit one-month high on expectations of tighter policy

LONDON, April 19 (Reuters) – Euro zone government bond yields jumped to their highest level in more than a month on Wednesday, with investors bracing for interest rates to rise further as worries about the financial system fade and policymakers called for tighter policy.

European Central Bank chief economist Philip Lane on Tuesday backed a further interest rate increase at the bank’s May policy decision but said the size would depend on incoming data.

Markets are now fully pricing in a 25 basis point rate hike at next month’s meeting, with around a 20% chance that the ECB raises rates by a larger 50 basis points.

Germany’s 10-year government bond yield, the euro area’s benchmark, hit its highest level since March 10 at 2.54%. It was last up 5 bps at 2.518%.

The country’s two-year yield, most sensitive to changes in interest rate expectations, rose 6 bps to 2.948%.

Danske Bank chief analyst Jens Peter Sørensen highlighted further signs of normalisation in the banking sector for today’s move in bonds, after Sumitomo Mitsui Financial Group became the first major bank to sell additional tier-1 (AT1) debt since similar bonds were wiped out in the takeover of Credit Suisse.

“Things are getting back to normal, we can put the banking worries behind us,” Sørensen said.

“We can now focus on fundamentals and inflation. And inflation is too high so the ECB has to do more,” Sørensen added, forecasting a peak ECB deposit rate of 4%.

Goldman Sachs raised its terminal rate forecast for the ECB to 3.75% from 3.5%, given “receding banking tensions, strong indications of underlying inflation and generally hawkish ECB commentary”.

The November 2023 ECB euro short-term rate forward stood at 3.7%, implying market expectations for the deposit facility rate to peak above 3.8%, which would be reached with three 25-basis-point rate hikes.

ECB policymakers Isabel Schnabel, Klaas Knot, Pablo Hernández de Cos and Lane are all scheduled to deliver remarks throughout the day.

“Given that worries about the banking sector have receded, they will be likely to home in on inflation and on the ECB’s appropriate response,” said Daniel Lenz, head of euro rates strategy at DZ Bank in a note.

A final reading of March euro area inflation is published at 0900 GMT, with economists polled by Reuters expecting the flash consumer prices estimate to be confirmed at 6.9%.

Italy’s 10-year government bond yield rose 6 bps to 4.35%, pushing the closely-watched spread between Italian and German 10-year yields, a gauge of confidence in the euro zone’s more indebted countries, up to around 182 bps.

Britain’s 10-year yield rose 7.5 bps after inflation fell by less than expected in March, which will likely see the Bank of England raise its key rate at its policy meeting next month.

On the supply front, Germany is set to tap its 10-year benchmark for up to four billion euros.

(Reporting by Samuel Indyk Editing by Raissa Kasolowsky)

London stocks drop as UK’s high inflation raises bets for BoE hike

April 19 (Reuters) – Britain’s FTSE 100 slipped on Wednesday, snapping an eight-day rally as consumer prices fell less than expected, boosting bets for one more rate hike from the Bank of England (BoE) at its May monetary policy meeting.

The blue-chip FTSE 100 fell 0.3%, while the mid-cap FTSE 250 was down 0.5%, as of 0708 GMT.

Data showed Britain now has Western Europe’s highest rate of consumer price inflation, after it fell by less than expected in March to 10.1% from February’s 10.4%.

Traders now see a 95.3% in a 25-basis-point hike in May, with interest rates peaking in November.

Leading declines, Antofagasta fell 2.7% after the Chilean miner’s copper output fell in the March quarter from the previous three months due to lower water availability and reduced ore grades.

Industrial miners were down 1.1%.

(Reporting by Shristi Achar A in Bengaluru; Editing by Rashmi Aich)

Japan’s SMFG is first global bank to sell AT1 bonds since C.Suisse wipeout

TOKYO, April 19 (Reuters) – Japan’s Sumitomo Mitsui Financial Group (SMFG) 8316.T sold USD 1 billion of additional tier-1 (AT1) debt on Wednesday, becoming the first major global bank to sell the risky securities since similar bonds issued by Credit Suisse were wiped out last month.

The deal shows confidence in the banking sector of Asia’s second-largest economy and that risk appetite is returning as the turmoil in financial markets sparked by the collapse of two US regional lenders fades.

AT1 bonds – the riskiest tranche of a bank’s bonds also known as “contingent convertibles” or “CoCo” bonds – can be converted into equity or written off if a bank’s capital level falls below a certain threshold.

The market for AT1s froze after the government-brokered takeover of Credit Suisse by rival UBS in March. The Swiss regulator determined that more than USD 17 billion worth of Credit Suisse’s AT1 bonds will be written down to zero, even as shareholders, who sit below bonds in the priority ladder for repayment in a bankruptcy process, will receive over USD 3 billion.

The resultant tumult cast doubts on whether SMFG would move ahead with its planned AT1 offer, and led to Japan’s biggest bank, Mitsubishi UFJ Financial Group Inc, putting on hold its issuance until at least mid-May.

“SMFG had a choice of not selling them but they went ahead, likely signalling that the Japanese financial system may be more stable than those in other countries,” said Nana Otsuki, senior fellow at Pictet Japan.

SMFG sold the bonds in two tranches, in 89 billion yen (USD 662.50 million) five-year notes, and 51 billion yen 10-year bonds.

The 89 billion yen issuance carries a coupon rate of 1.879% for the initial five years and two-month period, a regulatory filing showed. That compared with an initial 1.534% coupon on similar bonds issued by the bank in December.

The 51 billion yen one has a coupon of 2.180% for the first 10 years and two months, compared with 1.750% on the 10-year bonds sold in December.

The terms were attractive for investors, some analysts said.

“In Japan, where spreads over corporate bonds are thin, the terms for these AT1 bonds were reasonably good, provided that the banking sector is credible,” said Pictet’s Otsuki.

Japanese banks’ AT1 bonds had been configured in a way the value is secured even if the government is involved in restructuring, and SMFG’s new issues are seen to have the same features, she said.

(Additional reporting by Kaori Kaneko; Editing by Muralikumar Anantharaman)

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