Market set for firm opening ahead of RBA decision

10.02 AEST, Tuesday 2 October 2012

Market set for firm opening ahead of RBA decision
By Ric Spooner (Chief Market Analyst, CMC Markets)

The Australian market looks set for a firm opening this morning as investors await the RBA decision.

Signs are emerging that growth rates are improving in the US economy. Last night’s news of a better than expected print on the ISM manufacturing index follows clear signs of improvement in the housing sector over recent months. This is an encouraging development for international markets given the US lead role as the world’s largest economy. However, negotiation of a sensible outcome on the fiscal cliff and government debt remains a significant source of risk for the US economy and investors may be reluctant to reduce the risk premium built in to valuations before this is resolved.

A rate cut today looks like a line ball decision for the RBA. With a division of opinion amongst analysts on whether the RBA will move, a rate cut today has the potential to move markets this afternoon. There is potential for the Aussie Dollar to drop and for a rally in stocks that would benefit from a weaker currency or improved domestic spending.

Last month’s RBA minutes suggest that the banks outlook for domestic growth is likely to be the key variable in their decision. Statistics on the domestic economy over the past month including job losses; further announcements of a wind back in planned mining investments and reduced spending by both State and Federal governments could easily justify a rate cut. If the bank chooses to wait for further data on the state of the local economy before acting, this week’s retail sales and building approval figures as well as next week’s employment data will provide an important insight into the November rate decision.

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