Main Themes: Investor sentiment was resilient on Friday night despite slightly disappointing US jobs data.
Share Markets: The US stockmarket had a strong session, led by shares in Apple Inc. on news Warren Buffett had bought additional shares. The Dow rose by 1.4%, the S&P 500 gained 1.3% and the Nasdaq lifted by 1.7% for the session.
Interest Rates: US government bond yields were unchanged at the long end, but rose at the shorter end following the jobs data. US 10-year government bond yields finished unchanged at 2.95%. US 2-year government bond yields lifted from 2.48% to 2.50%.
Foreign Exchange: The US dollar index (weighted against a basket of currencies) rose 0.2% from Friday morning, to its highest since December. The Euro softened and Sterling fell against the US dollar, while the Yen was little changed.
The Australian dollar proved resilient, edging marginally higher against the US dollar. AUD/USD is trading around 0.7539 currently. The New Zealand dollar weakened versus the US and Australian dollars.
Commodities: Commodity prices strengthened, led by the oil price, as investors await news on possible US sanctions against Iran amid tight supply globally. WTI oil increased US$1.30 to US$69.70 per barrel, its highest in over three years.
Australia: The Reserve Bank (RBA) maintained a mostly upbeat view regarding the global and domestic economies in its Statement on Monetary Policy released on Friday.
One key change was the insertion of the comment “if the economy continues to perform as expected, higher interest rates are…likely to be appropriate at some point”. However, the RBA added the caveat, “the Board does not see a strong case for a near-term adjustment in the cash rate”.
There were some more notable hawkish undertones in the RBA’s commentary, particularly around inflation. The RBA highlights that that globally “there is a risk that inflation will pick up more quickly than is currently expected” and referred to capacity constraints across firms globally and domestically.
The RBA altered some its underlying inflation, unemployment rate and GDP growth projections for the nearer term. Underlying inflation forecasts for 2018 were raised, GDP growth forecasts for 2017/18 were upgraded but unemployment rate forecasts for 2018 were revised up.
The RBA leaves little doubt that the next move in the cash rate will be up if the economy continues to perform as expected by policymakers. The timing over the medium-term remains the big question. We continue to expect a rate-hike cycle to begin next year.
China: The Caixin composite purchasing managers’ index (PMI) rose to 52.3 in April, from 51.8 in March. The Caixin services PMI also improved over the same time period, from 52.3 to 52.9.
Europe: The final reading on the Markit services PMI fell to 54.7 in April, from an earlier reading of 55.0 and from 54.9 in March. The index remains above 50 signalling ongoing expansion in Eurozone services sector activity.
Retail sales rose by 0.1% in March, after rising by 0.3% in February. Annual retail sales growth slowed to 0.8% in March, from 1.85% in February.
United States: The 164k increase in payrolls in April was below consensus expectations for a 193k increase. This followed an increase of 135k in March. The data included upward revisions worth 30k over February and March. Cold weather likely weighed somewhat on job creation.
The unemployment rate (which is taken from the separate household survey) fell to 3.9% in April, from 4.1% in March. The unemployment rate outperformed consensus expectations for a decline to 4.0%. The US unemployment rate is now at a near 17½-year low.
The workforce participation rate slipped to 62.8% in April, from 62.9% in March.
Average hourly earnings rose by a smaller than expected 0.1% in April (the consensus forecast was for a 0.2% increase). For the year to April, average hourly earnings increased 2.6%. This followed a downwardly revised annual increase of 2.6% in March (which was previously reported as a 2.7% increase).
San Francisco Fed President Williams (also the incoming New York Fed President) said he expected three or four rate hikes this year and noted I don’t see any rapid increase in inflation coming, so I feel this is pretty much a ‘Goldilocks’ economy.”
Atlanta Fed President Bostic (a voter) said he expected the Fed to hike three times this year, but that “I’m open to going either direction, going back to two or going to four, depending on what the data show.”
Dallas Fed President Kaplan (a non-voter this year) was a little more wary on the lack of inflation in the payrolls report, saying “I think this may be just a one month aberration. Everything I see tells me there’s more inflation pressure out there.”
Fed President George (also a non-voter this year) said more rapid rate increases could be needed if the economy appears to be overheating.
Today’s key data and events
AU AiG Perf of Constr’n Index Apr prev 57.2 (8:30am)
AU Business Survey Apr (11:30am)
Business Conditions Index prev 14
Business Confidence Apr prev 7
EZ Markit Retail PMI Apr prev 50.1 (6:10pm)
EZ Sentix Investor Confidence May exp 22.4 prev 19.6 (6:30pm)
US Consumer Credit Mar exp US$16.0bn prev US$10.6bn (5am)
Times are AEST. All data forecasts are m/m or q/q and seasonally adjusted unless otherwise specified. Forecasts for Australian data are our forecasts and for other countries they are consensus forecasts.
Jo Horton, Senior Economist