Market sentiment supported risk assets this week, with optimism towards a de-escalation in the Middle East remaining the central expectation. Front month crude oil futures fell by more than 7% on the week to below US$95, helping drive equity markets to broad-based gains and a bid into bonds reflecting reduced inflation risks. Higher beta currencies (EUR, GBP and AUD) were supported amid that backdrop. In central bank news, the RBA was joined by Norway's Norges Bank in hiking rates this week.
The RBA delivered its third consecutive 25bps rate hike this week, raising the cash rate to 4.35%. Markets price in at least on further hike for the cycle, though the stage has been set for a near-term pause. At the post-meeting press conference, Governor Bullock described the cash rate as 'a bit restrictive', now at a level that addresses inflation risks while also giving the Board time to assess developments in the Middle East and in the Australian economy.
Under current futures pricing for brent crude oil, the RBA raised its forecasts for inflation to peak later this year at 4.8% in headline terms and 3.8% on a core basis. But using a much higher path for the cash rate than was assumed by markets in February, the growth outlook has slowed materially this year (1.3%) and next (1.4%). For a full review of the meeting please see my note here. On the Australian data front, household spending in March was boosted by the fuel price surge (see here); the trade balance swing into deficit for the first time since 2017 (see here); and dwelling approvals retraced (see here).
US nonfarm payrolls beat expectations for the second time in as many months, up 115k in April against the 65k consensus. Backward revisions were a net negative but only deducted a modest 16k from payrolls over February and March. With employment picking up and labour force participation declining slightly to 61.8%, the unemployment rate remained at 4.3%. Meanwhile, average hourly earnings growth firmed from 3.5% to 3.6%yr. Overall, this was a solid update on the US labour market that has remained more resilient than widely expected - including the Fed. Amid the uncertainty around the Middle East, markets have the Fed remaining on hold through year-end.
Local elections in the UK have so far not been a market event, with counting to take some time and the early results largely as expected seeing heavy losses for the incumbent government. More volatility in GBP exposures could be seen next week if the results continue to increase pressure on PM Starmer. In the euro area, the unemployment rate fell from 6.3% in February to 6.2% in March, returning to cycle lows. However, the Middle East conflict and trade uncertainty remain headwinds to the labour market outlook - though the ECB appears on track to hike rates in June.
