US equities posted their largest weekly declines in at least a year after strong payrolls data drove a hawkish repricing, with markets now pricing in a 25bps hike from the Fed this year. This lent support to the USD, following market rates higher. The 2-year treasury yield rose to 4.15%, its highest since February last year. Meanwhile, the ECB is expected to hike next week. Whereas at the RBA, a weak growth outcome in the March quarter looks like putting the brakes on further hikes for now.
An upside US nonfarm payrolls report now sees markets pricing in a Fed rate hike by year-end. Employment rose by 172k in May, well above the 88k consensus. Upward revisions of 93k over March and April lifted the 3-month average for payrolls growth to 188k, its highest since March 2024. The unemployment rate was steady at 4.3% for the third month running, while the broader unemployment rate declined slightly to 8.1%.
The degree of tightness in the labour market is a key consideration for the Fed moving forward. This was a strong report, but the monthly figures (and the revisions) are volatile. Lower labour force participation has also played a role. After trending down since late last year, the participation rate, unchanged in May at 61.8%, held at lows since October 2021.
The ECB is on track to tighten policy at next week's meeting, in line with recent guidance and market pricing for a 25bps hike. The tone of President Lagarde's press conference as well as updated economic forecasts will be key given markets are pricing in at least one further hike later in the year. This could hinge on the balance of risks between the outlook for growth and inflation, where the former has up until recently has held more weight with the Governing Council.
Australian economic growth was softer than expected slowing from 0.9% to 0.3% in the March quarter, though annual growth was steady at 2.5%. The slowdown was driven by net exports (-0.8ppt), with the fuel price shock and RBA rate hikes yet to impact. These headwinds risk slowing domestic demand (1%) that was looking fairly solid in the March quarter, supported by surging business investment (5.7%) and moderate household consumption growth (0.5%).
This was the strongest quarter for business investment in well over a decade, driven by the capex boom in data centres in tech- and AI-related industries. Much of the capital equipment required in data centre fit-outs is import-intensive, which weighs on GDP growth in the short term. Cyclones that disrupted the resources sector was another key factor behind the large deduction to growth from net exports. My full review of the March quarter National Accounts is available here.
Slowing growth with risks to the downside has reaffirmed RBA rates outlook, with a further hike to the cash rate priced no higher than a 50/50 prospect. Speaking at a Senate testimony, RBA Governor Bullock said the 75bps of rate hikes delivered this year had been required to cool domestic inflation pressures, and to guard against the risk of the oil price shock sparking another broader inflationary episode. Bullock said there were already signs in the housing market that higher rates were taking effect.
