US bond yields traded to the top end of their ranges for the year as data on the labour market came in strong and Fed officials continued to communicate they are in no rush to cut rates. In this context, it was surprising that the US dollar lost ground to several majors this week. Equities were soft to start the new quarter, though this follows strong gains through Q1. Highlights next week include US CPI and the FOMC meeting minutes (Wed) as well as policy meetings at the ECB (Thu), Bank of Canada (Wed) and Reserve Bank of New Zealand (Wed).
Friday's US employment report has validated the message of patience coming from Fed officials, reiterated Chair Powell this week. Nonfarm payrolls surged by 303k in March, the strongest one-month increase since last May and well clear of the 214k rise expected, while backward revisions boosted payrolls by a net 22k over January and February. As a result, the 3-month average increase for payrolls lifted to 276k, its highest level in a year. Moreover, the unemployment rate fell back to 3.8% from 3.9% previously, the 26th consecutive month below 4%. But perhaps the most influential aspect of the report was that these outcomes came alongside a slowing in average hourly earnings growth from 4.3% to 4.1%yr, indicating that the strong labour market is not leading to upward pressure on wages. A rising labour supply is likely to be playing a role here, with the participation rate rising from 62.5% to 62.7%; the key prime-age participation rate eased from 83.5% to 83.4% but remains around its highest levels in 15 years.
An encouraging inflation print is unlikely to change the outcome of next week's ECB meeting, with expectations firmly anchored on a June start to the easing cycle in the euro area. Downside surprises in March saw headline inflation fall from 2.6% to 2.4% (vs 2.5% exp) while the core rate came in from 3.1% to 2.9% (vs 3% exp), a 25-month low. With rates at restrictive levels and inflation within touching distance of the ECB's 2% target, a strong case could be made for a rate cut next week. But the account of the March meeting made clear that the Governing Council is taking a more cautious approach as it waits for more data before giving the green light to easing policy. It was highlighted that by the June meeting, the Governing Council will have before it a new set of forecasts and "significantly more data", including on wage dynamics, whereas the information on hand at next week's meeting will be "much more limited" and thus making harder for it to be sufficiently confident that inflation will return durably to target.
The March RBA meeting minutes reflected the Board's tilt to a more neutral messaging on policy. For the third meeting in succession, the Board left the cash rate on hold at 4.35%; however, on this occasion, there was no mention of a hike being considered. Up to this point, the minutes from every meeting since the tightening cycle commenced in Australia in May 2022 have explicitly stated that the Board has considered hiking rates. Although it has taken the RBA longer to arrive here, it is now effectively on the same page as many of its peers in signalling that rates have peaked, with the focus turning to how long restrictive monetary policy will be maintained.
A key judgment from the Board was that the balance of risks to the economy has "become a little more even", indicating a more cautious approach to policy going forward. On the one hand, the goal of returning inflation to target within a reasonable timeframe is not yet assured, but on the other, the Board highlighted that it is also important to preserve the gains made in the labour market. Also of note out of the meeting was the Board's intention to transition from a post-pandemic state of excess system reserves to an 'ample reserves' regime. The RBA's Assistant Governor Kent expanded upon this decision in a speech, highlighting 'ample reserves' as the most efficient approach to implementing monetary policy. Local data updates this week included a 1.9% fall in dwelling approvals in February (see here) and a narrowing in the monthly trade surplus to $7.3bn (see here).