A rebuilding of US rate cut expectations unwound as May's nonfarm payrolls number (272k) printed well above expectations. But the situation could easily turn again given there were lingering questions over the signal from the data and with a US CPI report and Fed meeting coming up next week. Both the Bank of Canada and the ECB announced rate cuts this week, joining the SNB and Riksbank as other G10 central banks now easing monetary policy. In Australia, GDP growth disappointed expectations in Q1 and if next week's labour market data comes in soft, then pricing for RBA cuts in 2024 will likely increase.
Australia's growth slowdown extended into early 2024 as Q1 GDP was weaker than expected at 0.1% (vs 0.2%); growth through the year moderated from 1.6% to a tepid 1.1% - its slowest pace excluding the Covid period since the early 1990s. Domestic demand is running at a more elevated 2.3% year-ended pace, but that includes a sizeable contribution from the public sector. Private demand is weak, characterised by a household sector that is cutting back in response to cost of living pressures and higher interest rates. Business investment, which had been expanding solidly, lost momentum in Q1, while headwinds continued to impact residential construction activity. For an in-depth analysis of current economic conditions in Australia, please see my feature review of the Q1 National Accounts here.
In other developments in Australia this week, housing finance accelerated by 4.8%in April (see here) alongside a further rise in national housing prices. The current account unexpectedly fell back into deficit at -0.7% of GDP in Q1 (see here). Meanwhile, the monthly surplus on goods trade widened to $6.5bn in April but remains on a narrowing trend (see here).
In the US, May's employment report left markets with more questions than answers. Nonfarm payrolls surged by 272k for the month, well ahead of estimates for 180k; however, employment in the household survey was reported to have fallen by 408k. As a result of the latter, the unemployment rate ticked up from 3.9% to 4% (vs 3.9% expected) - its highest since the start of 2022. This came alongside a decline in labour force participation from 62.7% to 62.5%. Rounding out the report, average hourly earnings surprised to the upside printing at 4.1%yr (vs 3.9%) from a revised 4% in April. Given the noise in the report, markets will place a lot of weight on next week's CPI report and Fed meeting.
The ECB cut its key rates by 25bps (to 3.75% on the depo rate), citing that it was moderating "the degree of monetary policy restriction" in light of increased confidence in the inflation outlook. This was a move fully discounted into market pricing having been signalled at the April meeting. That said, the recent data for growth and wage and inflation outcomes had surprised to the upside, prompting revisions to the ECB's staff macroeconomic projections. This left the optics of the ECB cutting rates at the same time as upgrading the growth outlook (GDP in 2024 was revised to 0.9% from 0.6%) and raising its inflation forecasts; headline inflation is now seen at 2.5% this year (from 2.3%) and 2.2% next year (from 2%), with the core rate up to 2.8% (from 2.6%) in 2024 and 2.2% (from 2.1%) in 2025.
In the post-meeting press conference, ECB President Christine Lagarde said that the move to cut despite the revised outlook reflected a more forward-looking approach to policy. Lagarde highlighted that inflation was still ultimately expected to return to the 2% target in Q4 2025 - an outlook unchanged since last September - and this was behind the Governing Council's vindication to cut. But Lagarde said the Governing Council was non-committal on the path rates will take from here, leaving it up to the incoming data. Markets are pricing in two additional rate cuts by year-end, occurring on a quarterly profile at the September and December meetings.