RBA surprises with cash rate hike, and Yellen warns of cash shortfall in June

RBA signals possible further tightening amid unexpected rate hike; Yellen warns of potential US Treasury cash shortfall in June; Morgan Stanley plans fresh job cuts while Biden lauds JPMorgan deal.

By Ahmed Azzam | @3zzamous | 2 May 2023

  • Australian Reserve Bank unexpectedly raises cash rate by 25 basis points to 3.85%, marking the 11th rate increase in a year.

  • Morgan Stanley plans to cut about 3,000 jobs this quarter, or roughly 5% of staff.

  • US Treasury Secretary Janet Yellen warns that the government could run out of cash as early as June 1.

  • FDIC announces options to overhaul its main insurance fund and Axon Enterprise replaces First Republic Bank in the S&P 500.

What’s happened?

As markets reopened after a holiday in Asia, equities showed a mixed picture, with US futures dipping while European contracts advanced. The dollar and benchmark Treasury yields both fell slightly.

In Australia, the Reserve Bank of Australia (RBA) unexpectedly raised the cash rate by 25 basis points to 3.85% during its May meeting. This marks the 11th rate increase in a year, bringing borrowing costs to their highest level since April 2012, defying market expectations of an extended pause. The RBA cited high inflation, currently at 7% in Australia, as the reason behind the decision, and signaled that further tightening may be necessary to achieve its inflation target, depending on how the economy and inflation evolve. However, the RBA reiterated its resolute determination to return inflation to target and said it would do what is necessary to achieve that.

What to watch?

Meanwhile, Treasury Secretary Janet Yellen warned Congress that the US Treasury could run out of cash as early as June 1, potentially leaving the government unable to meet its obligations. President Joe Biden has invited congressional leaders to a May 9 meeting at the White House to discuss the debt limit.

In corporate news, Morgan Stanley is reportedly preparing fresh job cuts amid a renewed focus on expenses. The firm is expected to eliminate about 3,000 positions this quarter, equal to roughly 5% of staff, excluding financial advisors and people supporting them within the wealth management division. The banking and trading group is expected to see many of the reductions.

In other news, Joe Biden hailed US regulators for facilitating JPMorgan's acquisition of the regional lender, calling the deal stabilizing. The FDIC announced options to overhaul its main insurance fund that included a targeted coverage approach for business accounts. Additionally, Axon Enterprise will replace First Republic Bank in the S&P 500.