Further signs of a slowing US economy weighed on risk sentiment globally amid the fallout from the stresses in the banking system and with the Fed indicating it will continue to hike rates. A reappraisal of hard landing prospects in the US lowered bond yields, but equities did not rally off the back of the move. Domestically, the RBA elected to pause its tightening cycle, in stark contrast to a surprise 50bps hike from the RBNZ. Highlights on the calendar next week include US CPI, the FOMC meeting minutes and Australia's Labour Force Survey.
US economy cooling
Data through the week were consistent with a slowing US economy, but with conditions holding up for now. Nonfarm payrolls posted a 236k rise in March (vs 230k expected), a solid rise but well down from the gains in January (472k) and February (326k). The supporting detail was the most impressive component of the report, with falls in both the unemployment rate (3.6% to 3.5%) and the broader underemployment rate (6.8% to 6.7%) coming alongside a rise in the participation rate (62.5% to 62.6%); notably, participation in the 25-54 years category remained at 83.1%, in line with its high pre-pandemic high in early 2020. From the perspective of wage pressures, softer growth in average hourly earnings from 4.6% to 4.2%yr and a decline in job openings to 9.9m in February will be welcomed by the Fed, though that appears unlikely to deter the FOMC from hiking rates in May.
Many, though, are pointing to the lagged nature of the payrolls data and are focusing on more concurrent indicators. Here, the ISM services gauge slowed from 55.1 to 51.2 in March, remaining in expansionary territory but with the pace of growth slipping below the 12-month average (54.9). That came as growth in new orders slowed sharply (62.6 to 52.2), with business activity (55.4) and employment (51.3) also softer in the month. Meanwhile, the ISM manufacturing gauge saw its 5th consecutive month in the contractionary range (46.3).
RBA pauses to take stock
The rate-hiking cycle in Australia came to a pause as the RBA left its key rate unchanged at 3.6% this week. My detailed recap of the decision is available here but in summation, the Board elected to hold judging that the cumulative rise in rates of 350bps had lifted the cash rate to a suitably restrictive setting and that the full effects of tighter monetary policy were still to play out. The Board softened its tone on the prospect of further rate hikes to "may well be needed" from a more definitive line of "will be needed" at the previous meeting, amplifying the message that the incoming data holds the key to the direction of policy.
Expanding on the decision in a speech, RBA Governor Lowe said the Board was returning to a strategy used in previous tightening cycles: raising rates for a period then stepping back to take stock of the effects on the economy. In this cycle, Governor Lowe said the Board needed to be particularly mindful that: stresses in banking systems overseas would be a headwind for global growth; household spending in Australia had already "slowed considerably"; and wage and price-setting developments were not presenting as consistent with entrenching a high inflationary environment.
In the post-speech Q&A, Governor Lowe said that while other central banks may continue hiking rates to drive a faster return of inflation to their respective targets, the RBA was aiming to preserve much of the pandemic-rebound employment gains, noting also that the larger share of mortgages on variable rates had accelerated the pass-through of monetary tightening in Australia. In that respect, the RBA's Financial Stability Review noted that while most households are in a position to withstand the rise in interest rates, a sharper-than-expected increase in unemployment would tip more households and businesses into financial stress.
The latest round of domestic data continued to reflect the impact of softer demand associated with higher rates and cost-of-living pressures. Housing finance fell a further 0.9% in February to be down by a third from the peak in early 2022 (see here); finance for new home building is a notable point of weakness, reflected in weak building approvals data (see here). Meanwhile, the trade surplus widened to $13.9bn in February, though this was driven by a slump in imports consistent with weakening domestic demand (see here).
ECB and BoE keeping options open
Commentary from the chief economists at the ECB and BoE suggested both central banks needed to retain an open mind with policy settings. The ECB's Lane noted that a further rate hike in May "will be appropriate" if the euro area economy was still tracking in line with economic projections it published in March, though there was uncertainty around how the banking stresses would impact conditions. BoE Chief Economist Pill outlined in a speech the various crosscurrents that he was weighing up. Pill is attentive to risks of persistent inflation, though he is also wary of the implications of tighter financial conditions stemming from the banking stresses and the terms of trade shock that continues to hit the UK.
