An upbeat start to the month for markets on the back of the US debt ceiling agreement, expectations the Fed could remain on hold at the next meeting, and indications China is considering measures to support the property market. Highlights on the calendar next week include policy meetings from the Bank of Canada and RBA, the ISM services survey in the US and Q1 GDP growth in Australia.
US employment continues to surge
Contrasting US data opens the door to the Fed staying on the sidelines at its upcoming meeting. Nonfarm payrolls lifted by 339k in May, printing above expectations (195k) for the 14th month running, and with an additional 93k added back to payrolls over March and April. Taken with the 358k rise in job openings to 10.1 million in April, US labour demand remains unequivocally strong. However, despite all this, the unemployment rate rose from 3.4% to 3.7%, even as participation came in unchanged at 62.6%. Meanwhile, average hourly earnings softened from 4.4% to 4.3%, down from 5.5% a year ago.
Weakness in the US data was evident in the ISM manufacturing survey. Activity in the sector remained in contraction at a 46.9 reading in May, with weakness in demand and eased constraints on the supply side. Incoming orders fell for the 9th month in succession, while delines in input prices and faster delivery times reflected improvements in supply chains.
Markets revise RBA rates pricing higher
A rise in Australia's 12-month inflation rate to 6.8% in April together with the Fair Work Commission's announcement of a 5.75% increase to award pay rates in 2023/24 sees markets expecting additional RBA tightening. The peak rate has been repriced to 4.1%, with the chance of a 25bps hike at next week's RBA meeting assessed at around 40%. Adding to the sense of a live meeting upcoming, RBA Governor Philip Lowe at a Senate testimony said the Board was in a data-dependent mode, understood to mean that it has not yet reached any conclusion on whether rates are at the appropriate level. While the data since the May meeting have tended to come in soft relative to expectations, Governor Lowe remains strong in the view that there are risks around the path back to the 2-3% inflation target, namely if productivity growth fails to pick up with wages growth in Australia at an 11-year high (albeit modest in global terms at 3.7%).
Next week's March quarter National Accounts are expected to show a further slowing in the growth momentum of the Australian economy, with a full preview available here. Inputs to hand this week, however, have limited some of the downside risks to quarterly growth, with capital expenditure lifting by 2.4% (see here) and construction activity advancing by 1.8% (see here). Housing finance commitments came in surprisingly weak in April (see here); however, the fundamentals of rising population growth and tight supply drove capital city housing prices to a 1.4% rise in May, according to CoreLogic. The supply pipeline remains constrained with April dwelling approvals falling to an 11-year low in April (see here).
More work ahead for ECB
Encouraging euro area inflation data in May accords with the ECB's decision last month to downshift the pace of tightening to a 25bps rate hike, though it maintains higher rates are required. Initial estimates showed inflation fell by more than expected in May: the headline rate declining from 7% to 6.1%yr, with the core rate softer at 5.3% from 5.6% previously.
Although the Account of the ECB's May meeting noted that some members had pushed for another 50bps hike, the decision to opt for a smaller 25bps increase was widely supported in the final analysis. But the Governing Council agreed that its communication would signal that there was more ground to cover in bringing rates to a level consistent with a timely return of inflation to the 2% target. In a speech, ECB President Christine Lagarde said that higher rates had led to tighter financing conditions, but the impact of this on the economy remained uncertain. There was a slight change in tone from President Lagarde, noting in the speech that financial stresses could lead to additional tightening in lending standards, which would have implications for ECB rates; previously, the ECB has sought to draw a distinction between financial stresses and monetary policy.