Bond yields tested their March highs seen prior to the SVB collapse in the US resulting in equity markets pulling back this week from recent strength. In spite of this, US dollar strength was notably absent, helping support a rise in the Australian dollar even as the RBA surprised somewhat by leaving rates on hold this week. Highlights on next week's calendar include June's CPI report in the US, rates decisions in Canada and New Zealand and in Australia Governor Lowe will speak on monetary policy.
Signs of slowing in the US labour market
For the first time in 15 months, US nonfarm payrolls came in weak relative to expectations. June nonfarm payrolls printed at 209k - still a solid outcome - but below the 230k consensus and the slowest increase since December 2020. Furthermore, revisions saw 110k subtracted from payrolls over April and May. Separately, job openings, while still elevated, declined by around 500k to 9.8 million in May. But, overall, the labour market remains strong; the unemployment rate declined from 3.7% to 3.6% to be just above 50-year lows and the participation rate in the major (25-54 years) category ticked up to 83.5%, its highest since 2002.
As noted in the minutes of the FOMC's June meeting, its inclination is that further rate hikes are likely; some members, in fact, made the case for a June hike, but ultimately the decision to leave rates on hold was unanimous. Back to the payrolls report, average hourly earnings were running at 4.4% over the year to May, around the sort of pace the FOMC observed in the minutes was above being consistent with its 2% inflation target, based on current trends in productivity growth. The FOMC's projections from the June meeting showed an expectation for a further two rate hikes to a peak of 5.5-5.75%.
RBA holds but likely to hike further
The RBA left its cash rate on hold at 4.1% this week, a somewhat surprising decision given its recent hawkish messaging. Governor Lowe's statement seemed to convey a more cautious analysis on this occasion; the Board recognising the risk of overtightening into an economic outlook that was uncertain and with the full effects from its substantial hiking cycle (400bps) still in the pipeline (see more here). The Board, however, left its guidance that further tightening "... may be required" intact and that it remained alert to signs of high inflation becoming more persistent, particularly through adjustments to price and wage-setting processes. Markets sense a rate hike could be forthcoming at the August meeting when the RBA will also update its economic projections. Key inputs to inform the decision will be June's labour force survey (20/7) and Q2's CPI report (26/7).
Data through the week showed further strengthening in the Australian housing market. Constrained supply - CoreLogic reporting listing inventories are 25% below average levels - at a time of rapid population growth is pushing prices higher. Nationally, housing prices lifted by 1.1% in June to be up a little more than 3% from February's trough. These dynamics were reflected in a sharp 4.8% increase in housing finance commitments in May (see here). Notwithstanding a rebound in May (20.6%), dwelling approvals remain at low levels consistent with headwinds to home building from cost increases, rising interest rates, and weak sentiment (see here). Also this week, the nation's trade surplus widened to $11.8bn in May as export earnings - underpinned by the major resources - remained elevated (see here).
Erring on the side of caution for the ECB and BoE
Surveys of inflation expectations in the euro area and UK have reaffirmed that both the ECB and BoE respectively are likely to err on the side of tightening monetary policy too much than too little. The ECB's Consumer Expectations Survey reported that while households anticipate inflation to fall, inflation is expected to remain above the ECB's 2% target at the 12-month (3.9%) and 3-year (2.5%) horizons. Similarly, the BoE's Decision Maker Panel survey showed UK businesses see inflation on a declining trajectory, though at 5.7% on a year-ahead basis and 3.7% for the 3-year projection the outlook is for inflation to remain above the central bank's 2% mandate. While these surveys provide only one measure of inflation expectations (inflation is anticipated to fall closer to the ECB's and BoE's targets on other measures), they are consistent with the messaging from the ECB and BoE that additional tightening will be required.
