Main Themes: Data showed a surge in US jobs in April and a drop in the unemployment rate to a 49-year low. However, wages growth in the US remained subdued. Financial markets also open this morning to news over the weekend that the US might raise tariffs on Chinese imports. Furthermore, North Korea’s missile testing has added to the negative sentiment over the Asian region.
Share Markets: US share markets jumped on Friday after stronger-than-expected US jobs data. The Dow Jones powered ahead by 197 points (or +0.8%) and the S&P 500 index pushed 28 points higher (or +1.0%). The S&P 500 finished within a whisker of its all-time closing high.
Interest Rates: US Treasury yields fell across the curve, despite the strong payrolls report in the US. The weak wages data accompanying the surge in payrolls prevented bond yields from rising. Moreover, speeches and remarks from a number of Federal Reserve policymakers on Friday gave mixed messages. The US 2-year and 10-year yields fell by 1 basis point and 2 basis points, respectively. The chances of a rate cut from the Federal Reserve by the end of the year remained unchanged at 65%.
Foreign Exchange: News over the weekend that the US may raise tariffs on Chinese imports has contributed to the AUD/USD opening weaker this morning. A North Korea missile test has also added to tensions in the Asian region. The AUD/USD is trading around the 0.6980 handle and threatens to tread lower ahead of the RBA rate decision tomorrow. A rate cut cannot be ruled out.
Commodities: Both gold and oil advanced in Friday’s trading session. A basket of widely-watched base metal prices, the LMEX index, also closed higher on Friday night.
Australia: Building approvals dropped 15.5% in March and mostly reversed a 19.1% surge in February. This data confirms that the jump in February was a one-off and that the downward trend in approvals remains intact.
The large swings in recent months were driven by the ‘other’ approvals category, which includes apartments, particularly in NSW and Victoria.
Approvals in both private sector ‘other’ and private sector houses sit significantly below their recent peaks, down 55.8% and 17.9%, respectively.
China: US President Trump increased pressure on China on Friday. Trump said tariffs on US$200 billion of imports will rise from 10% to 25%. He tweeted that trade talks with China were going “too slowly, as they attempt to renegotiate”. Trade-talk discussions resume this week when Chinese Vice Premier Liu He returns to Washington. The White House earlier warned the US could still walk away from the months-long negotiations, but said a meeting between the countries two presidents to finish the deal is likely.
Europe: Core inflation lifted to 1.2% in the year to April, up from 0.8% in March. However, the timing of the Easter holiday seasons likely played a key role in lifting core inflation. On a two-month average basis, core inflation has lifted only modestly in 2019 from 0.9% year-on-year in March to 1.0% year-on-year in April. Much of the increase is from an acceleration in services inflation.
North Korea: North Korea conducted the first ballistic missile test since 2017 on the weekend, lifting geopolitical worries in the region.
United Kingdom: Prime Minister May’s officials are drafting a new law in preparation for a Brexit deal between the government and the opposition Labour party that they hope will break the deadlock.
In terms of data, the Markit gauges for the services and composite purchasing managers’ indices (PMIs) improved in April. The services PMI lifted half a point to 50.4 and the composite PMI rose 0.9 of a point to 50.9. Both indices are now above 50.0, which suggests an expansion of activity is likely.
United States: Non-farm payrolls surged 263k in April, beating market expectations for a rise of 190k. The job gains were spread across most industries. The unemployment rate fell from 3.8% in March to 3.6% in April, the lowest since December 1969, helped by a drop in the participation rate.
Wage gains did not accelerate, despite the continued tightening in the labour market. Average hourly earnings rose by 0.2% in April and the annual rate of growth stayed steady at 3.2% for the second straight month.
A broader measure of unemployment is the underemployment rate, which includes people who want to work but have given up searching and those working part-time but wish to work full-time. This measure was unchanged at 7.3% in April.
In other data, the ISM manufacturing index edged down slightly in April to 55.5, from 56.1 in March. It is the lowest reading since October 2016, but remains in the territory (over 50.0) that is still consistent with expanding activity. Broad-based declines in the headline, new orders, new export orders and production indices suggest factory-sector activity is cooling.
A number of members of the Federal Reserve gave speeches or remarks on Friday. US Federal Reserve Richard Clarida said the US economy "is in a very good place" with low unemployment and "muted" inflation. While Clarida did not discuss the issue of future moves in interest-rate cuts, he made some dovish comments. He said the unemployment rate is "not far below" many estimates of its so-called natural rate, even though it dropped to a 50-year low of 3.6% in April.
Cleveland Federal Reserve Bank President Loretta Mester said the Federal Reserve has not lost credibility in its promise to keep inflation around 2%, despite a recent drop in the pace of price increases and a longstanding shortfall from its goal. Inflation expectations, she said, remain stable, and show no sign that businesses or households have lost faith that the Fed will let inflation slip, she said, rebutting perhaps the main argument of policymakers who feel interest rates should be cut soon. Mester said she sees risks to her outlook for economic growth of 2-2.5% as balanced and with job growth continuing there seemed no reason to consider raising or lowering rates. Mester added that the recent performance of the economy “kind of tells you we are in an equilibrium”.
The other two Federal Reserve policymakers to make remarks – Chicago Fed President Charles Evans and St. Louis Fed President James Bullard – showed concern about weak inflation. Evans said this year’s drop in inflation excluding the impact of food and energy was worrisome. He said he was also concerned the economy might underperform. Bullard was even more emphatic about his concern about the softness in so-called core inflation. Bullard said that if inflation expectations remain too low through the summer and actual inflation doesn’t seem to be picking up, then his concern would become more “intense”. Bullard suggested in this scenario rate cuts would be warranted.
Today’s key data and events:
AU MI Inflation Gauge Apr prev 0.4% (11am)
AU Job Ads Apr prev -1.7% (11:30am)
CH Caixin PMI Composite Apr prev 52.9 (11:45am)
CH Caixin PMI Services Apr exp 54.2 prev 54.4 (11:45am)
EZ Sentix Investor Confidence May prev -0.3% (6:30pm)
EZ Retail Sales Mar prev 0.4% (7pm)
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.
Besa Deda, Chief Economist