It was tougher going for risk assets this week as the outlook for Fed easing was pared back and fiscal and deficit concerns returned to the fray. It was a united front from central bank chiefs at the ECB's Sintra Forum as the keynote panel, which included Fed Chair Powell, indicated patience was the optimal policy approach at present. After a strong US employment report markets now price just 2 cuts from the Fed by year-end, giving little chance to a 3rd cut that was previously seen as a 50/50 prospect. Adding upward pressure to Treasury yields was the passage of President Trump's fiscal bill, estimated to add $3.4tn to the US deficit over the coming decade. In the UK the gilt market sold off due to renewed concerns over debt sustainability, but this was tempered by comments from BoE Governor Bailey hinting that the pace of quantitative tightening could slow.
A robust US employment report broadly validates the Fed's patient stance amid rising pressure from President Trump to lower rates. Nonfarm payrolls rose by 147k in June, an upside surprise on the 106k consensus. This saw the unemployment rate fall from 4.2% to 4.1%, defying an expected drift up to 4.3%. A slight fall in participation (62.3% from 62.4%) was a factor behind the lower unemployment rate, but employment growth is still tracking at solid pace deep into the post-pandemic cycle, averaging 150k over the past 3 months. Meanwhile, average hourly earnings growth eased from 3.9% to 3.7%, indicating that while conditions are robust tariffs rather than the labour market pose more of an inflationary risk going forward.
ECB President Lagarde reaffirmed this week in Sintra that policy is in 'a good place', a signal heeded by markets that are not discounting the next rate cut until December. Lagarde, speaking to outline the findings of the ECB's strategy review, said the Governing Council will deliver 'appropriately forceful or persistent monetary policy action in response to large, sustained deviations of inflation from the (2%) target in either direction'. Data this week showed euro area inflation sits at 2% on a headline basis as of June, firming from 1.9% on the back of higher energy prices. Core inflation was unchanged at 2.3%yr.
An underwhelming 0.2% rise in retail sales for May reiterated Australian households remain under pressure, firming expectations for the RBA to continue its easing cycle at next week's meeting. Deferred winter clothing sales were the only thing that saw retail sales hold up against declines in most other categories (see here). Sentiment is weak and households are cautious. There are enough signs for the RBA to reach the conclusion that the expected rebound in household consumption is at risk of falling behind the curve without additional support.
The RBA's two earlier rate cuts came in February and May, following the quarterly inflation reports. But as covered last week, the RBA will probably have enough conviction in the disinflationary process to make an earlier move after headline and core CPI slowed sharply in May to 2.1%yr and 2.4%yr respectively in the ABS's monthly gauge. In other news from Australia, national dwelling approvals stemmed a run of declines with a 3.2% rise in May (see here); while the trade surplus halved to $2.2bn in May after imports accelerated at their fastest pace for the year and exports declined, with US-bound exports retracing the month after the announcement of the administration's liberation day tariffs (see here).