Cautious tone expected leading into RBA decision

10.05 AEDT, Tuesday 4 December 2012

Cautious tone expected leading into RBA decision

By Ric Spooner (Chief Market Analyst, CMC Markets)

The unexpected sub 50 read on the US manufacturing index is likely to set a softer tone in early trade today as investors wait on the outcome of the RBA meeting.

The weaker than expected US manufacturing index followed softer Australian data yesterday in the form of retail sales and company profits. These figures serve to remind investors that the growth outlook is at best moderate as economies sail into the 2013 headwinds of fiscal drag and in, Australia’s case, lower mining investment activity.

Building approval statistics due this morning will provide a final read on the state of the economy prior to the RBA meeting. A lower print today for October would still be consistent with trend growth since late last year given that it follows strong increases in the previous 2 months. While approvals have picked up since earlier in the year, the RBA will be looking for the housing sector to do better than recent levels to take up some of the slack anticipated from lower mining investment.

The risk for short term traders today is skewed to the downside if the RBA fails to cut rates. Today’s decision comes after a strong rally since mid-November. This leaves the market vulnerable to a sell off if it the news is disappointing. The consumer discretionary sector has performed strongly since mid-November, but could come under pressure if rates are not cut. Yesterday’s retail sales figure indicates ongoing consumer caution and investors are likely to be nervous about this sector if rates are not cut.

If rates are cut today there is likely to be investor support for relatively high yielding stocks with a defensive earnings stream as the incentive to switch out of cash and fixed interest investments grows. While consumer discretionary and industrial stocks will be assisted by a rate cut, the impact of lower interest rates on spending is likely to be moderate given household focus on balance sheet repair.

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