US equity markets gained, after softer labour market data heightened expectations that the Fed will cut interest rates in September. Following the lead of the Bank of Canada (BoC) and European Central Bank (ECB).
The ASX 200 snapped a two-week losing streak, supported by tailwinds from Wall Street. A soft Q1 2024 GDP print increased the chances that the Reserve Bank of America (RBA) will cut interest rates before year-end.
In the US, the ISM manufacturing PMI fell to 48.7 in May from 49.2 prior US Jolts Job Openings declined by 296,000 to 8.059 million in April, to the lowest level since February 2021 The ADP employment report showed private payrolls rose by 152,000 in May, the weakest monthly reading since January Initial jobless claims for the week ending 1 June, unexpectedly rose by 8000 to 229,000, and Q1 unit labour costs were revised lower The ISM services PMI rose to 53, the highest reading since June 2023 As widely expected, the BoC cut its cash rate by 25bp to 4.75% As widely expected, the ECB cut its official deposit rate by 25bp to 3.75% In China, the Caixin Manufacturing PMI rose to 51.7 in May from 51.4 prior In Australia, GDP increased by 0.1% in the March quarter of this year for an annual rate of 1.1%, the lowest rate since 2000 outside of the pandemic era Crude oil fell 1.68% this week to $75.70 per barrel Gold gained 2.12% this week to $2376, bolstered by expectations of Fed rate cuts Wall Street’s gauge of fear, the Volatility Index (VIX), fell to 12.57 from 12.91 prior.CN
CPI and PPI
Date: Wednesday, 12 June 11.30am AEST
In April, China’s CPI maintained a positive territory at 0.3% year-on-year (YoY), delivering an uptick from 0.1% prior. April producer prices have also improved to a smaller YoY contraction, at -2.5% versus -2.8% in March.
The third consecutive month of positive consumer price growth may reflect some stabilisation in domestic demand, although recovery is still somewhat gradual with a subdued CPI read. Price increases in areas such as energy, education, and tourism, have aided to offset declining food prices.
Given the mixed set of PMI figures and trade data this week, market participants will be seeking more clues on the country’s economic recovery. To gauge the success of current policy support measures.
Expectations are for upcoming inflation read to remain stable, with consumer prices remaining unchanged at 0.3% YoY. While producer prices are expected to improve further to -1.8% -2.5%.
CN CPI and PPI chart
US
CPI
Date: Wednesday, 12 June at 10.30pm AEST
In April, inflation readings snapped a three-month run of stronger-than-expected readings. Headline inflation eased to 3.4% YoY from 3.5% prior, while core inflation eased to 3.6% YoY from 3.8%, its lowest reading since April 2021.
In May, the preliminary expectation is for headline inflation to stay at 3.4% YoY. Core inflation is also expected to remain stable at 3.6% YoY. An inline or cooler set of numbers, would likely reinforce expectations of a 25bp Fed rate in September, currently about 80% priced.
US core CPI chart
US
FOMC meeting
Date: Thursday, 13 June at 4.00am AEST
At the May meeting, the FOMC kept the Fed funds rate unchanged at 5.25%-5.50% for a sixth consecutive meeting. Fed Chair Jerome Powell said, it would take longer than expected for inflation to return to the Fed 2% target. Thus, ruling out a rate cut in the near term as well as a rate hike.
The June FOMC meeting is expected to see the Fed keep rates on hold. Its dots will likely be updated to show two rate cuts are expected this year rather than three, reflecting inflations’ slower pace towards target.
The Fed Chair is expected to emphasise the need for patience, and for incoming inflation data to cool further, before the Fed acts on its rate-cutting bias.
Fed funds rate chart
AU
Labour force report
Date: Thursday, 13 June at 11.30am AEST
In April, the Australian economy added 38,500k jobs, stronger than forecasts of 23,700. A rise in the participation rate to 66.7%, saw the unemployment rate rise sharply to 4.1% from 3.9%.
Bjorn Jarvis, Australian Bureau of Statistics (ABS) head of labour statistics, said: ‘With employment rising by around 38,000 people and the number of unemployed growing by 30,000 people, the unemployment rate rose to 4.1 per cent and the participation rate increased to 66.7 per cent.’
The ABS noted that more people than usual are waiting to start work, like January when unemployment subsequently retraced. This means there is a risk of a sharp rebound this month.
Further stating: ’The 30,000 people increase in unemployment reflected more people without jobs available and looking for work, and also more people than usual indicating that they had a job that they were waiting to start in.’
Seasonal volatility aside, labour market slack is increasing. Despite very tight levels broadly in line with the RBA’s Q2 forecasts for 4.0%. At this early stage, the market expects the economy to lose 5000 jobs this month and for the unemployment rate to rise to 4.2%. The rates market is pricing in a 40% probability of a 25bp RBA rate cut before year-end.
AU unemployment rate chart
JP
BoJ interest rate decision
Date: Friday, 14 June at 2.00pm AEST
Above-target inflation and improving wage growth over the past month, may support the view for further policy normalisation. With the expectation of a virtuous wage-price spiral to bring the ‘sustainable and stable 2% inflation’ target.
Consequently, there will still likely be some caution around the pace at which the ultra-accommodative policies unwind. Given that easing inflation has yet to find a floor, while growth in consumer spending remains tepid, despite some signs of recovery.
This week, BoJ Governor, Kazuo Ueda, floated the idea of reducing the central bank’s bond buying. Leading market watchers to take it as a signal that it may occur as early as next week’s meeting. Focus will be on the pace of slowing from the current ¥6 trillion monthly bond-buying towards ¥5 trillion.
The timeline for the next BoJ’s policy hike will be sought from the policy statement and press conference. Current market expectations are for the BoJ rates to continue to rise in July. This is likely to draw attention to any shift in tone from the BoJ’s previous dovish stance.
BoJ policy rate chart
