Main Themes:The highlight on Friday night was the US non-farm payrolls release, which well exceeded estimates. Expectations of aggressive monetary easing by the Fed pared back. US shares fell, bond yields jumped and the US dollar rose.
Share Markets: Good news was once again bad news for shares.US shares lost ground as the strong jobs report tempered expectations of Federal Reserve easing. The Dow and S&P500 fell 0.2%.
Interest Rates: Yields on US interest rates rebounded sharply. The 10-year yield jumped 8 basis points to 2.03%. At the shorter-end of the curve, 2-year yields surged 10 basis points to 1.86%. Markets are continuing to fully price in a 25 basis point rate cut at the Fed’s next meeting at the end of this month, and two rate cuts by the end of this year, however expectations of more aggressive cuts have been pared.
While the loss of momentum in the US economy and the need to maintain confidence in the market support the case for a rate cut by the Federal Reserve as soon as its next meeting, the recent jobs data suggests the decision might be less of a done deal than what markets are suggesting.
Foreign Exchange: The US dollar index jumped following the surprisingly strong payrolls report. Major currencies conversely fell, while the AUD dropped back below 70 US cents to trade at 69.8 US cents this morning.
Commodities: Oil prices rose, as the tensions over Iran raised concerns over supply. It also followed the extension to output cuts by OPEC and its allies. Gold prices fell sharply, as the US jobs data pared expectations of monetary easing.
Australia: The AiG performance of construction index rose from 40.4 in May to 43.0 in June. Despite the improvement, the index remains well in contraction. As a trend, engineering construction is continuing to outperform other sectors, reflecting public infrastructure spending. Residential building, including both homes and apartments improved, but remain very weak.
Japan: Household spending growth picked up from 1.3% in April to 4.0% in May, boosted by accommodation spending due to an extended holiday at the beginning of the month. Spending is likely to pull forward ahead of a sales tax hike planned in October.
United Kingdom: House prices fell 0.3% in June according to Halifax, indicating that prices are continuing to struggle against the backdrop of Brexit uncertainty.
United States: Non-farm payrolls jumped 224k in June, well above the consensus estimates of 160k. It will help alleviate concerns about the health of the labour market, particularly as it followed a meagre 72k increase in the previous month. The unemployment rate edged up from a 50-year low of 3.6% in May to 3.7% in June, but still remains extremely low and was helped by a lift in workforce participation.
As a trend, job gains are still below the heady pace of last year. However, the sharp rebound is not yet suggesting a material slowdown in the pace of employment growth that is enough to suggest a trend increase in the unemployment rate.
On a less positive note, wage growth remained well contained. Average hourly earnings grew at an annual rate of 3.1% in June, unchanged from May, although a step down from the 3.2% expectated by the median estimate.
Today’s key data and events:
JN Current Account May exp ¥1.4trn prev ¥1.7 trn (9.50am)
JN Machinery Orders May exp -3.7% prev 5.2% (9.50am)
AU ANZ Job Ads Jun prev -8.4% (11.30am)
EZ Ger. Industrial Prod’n May exp 0.4% prev -1.9% (4pm)
US Consumer Credit May exp $17.0 bn prev $17.5bn (5am)
Janu Chan, Senior Economist