Markets Overview

  • ASX SPI 200 futures down 0.2% to 7,289.00
  • Dow Average down 0.3% to 33,426.63
  • Aussie up 0.3% to 0.6645 per US$
  • U.S. 10-year yield rose 2.7bps to 3.6726%
  • Australia 3-year bond yield rose 11 bps to 3.32%
  • Australia 10-year bond yield rose 11 bps to 3.59%
  • Gold spot up 1.0% to $1,977.81
  • Brent futures down 0.4% to $75.58/bbl

Economic Events

Equity futures for US and Asian stock benchmarks slid while currencies held within tight ranges in a cautious start to trading Monday as the risk of a debt default in Washington cast a shadow over markets.

Movements in most Group-of-10 currencies were confined to 0.1% versus the dollar. Contracts for the S&P 500 and the Nasdaq 100 dropped about 0.3% after the gauges registered small declines Friday. Amid the global focus on the debt-ceiling negotiations and US interest rates, futures for Japanese and Australian shares fell slightly and those for Hong Kong rose marginally.

President Joe Biden and House Speaker Kevin McCarthy are scheduled to meet later Monday following a “productive” call between the pair over the weekend. Yet one Republican negotiator is insisting on a multiyear spending limit, complicating talks even as default could come as soon as June 1.

Traders also remain fixated on the path for Federal Reserve’s benchmark interest rate, with bets for a hike in June trimmed to 25% as Jerome Powell signaled a pause. Minneapolis Fed President Neel Kashkari also said he may support a pause, Dow Jones reported.

Meanwhile, markets continue to be buffeted by tension between China and the US and its allies. Beijing announced on Sunday a ban on Micron Technology Inc. as Group-of-Seven leaders meeting in Japan pushed ahead with efforts to reduce dependence on China for critical supply chains.

The S&P 500’s drop Friday halted a two-day rally as it failed to stay above the closely watched level of 4,200. The $3.2 billion SPDR S&P Regional Banking exchange-traded fund slumped almost 2% on a news report that Treasury Secretary Janet Yellen told the chiefs of large lenders that more mergers may be needed.

Stocks are primed for a precipitous drop if the US fails to raise the debt limit and delays government payments.

That’s the warning from a team of UBS strategists. Although it’s unlikely, if the US formally defaults and delays all payments beyond principal payments for a week, the S&P 500 will fall as much as 20% toward 3,400, the team led by Jonathan Pingle said.

Other News

Australian Employment Minister Tony Burke strongly backed an increase in the minimum wage that matches inflation, arguing the lowest-paid workers couldn’t afford a further erosion of their living standards while dismissing the risk of a wage-price spiral.

“Where are you meant to cut — where inflation is at the moment — are you meant to skip a meal?” Burke said Sunday in an interview with Sky News, referring to the lowest paid. “They’re the people who have the least room to move.”

The government doesn’t want these employees to go backward, Burke said, when pressed on whether he specifically supported a 7% pay rise in line with inflation. The minister pointed out there will be further consumer-price figures released before the pay decision is taken.

Australian salaries increased at around half the pace of inflation in the first three months of 2023, data showed last week, suggesting wages remain relatively contained compared with global counterparts. The central bank is worried that if consumer prices remain elevated for a prolonged period, demands for much bigger pay rises will start to mount.

That was among the reasons it cited for unexpectedly raising interest rates this month — to try to bring inflation back to its 2-3% target more quickly. It has also signaled concern about Australia’s very weak productivity growth, which helps avoid steady wage increases from becoming inflationary.

“The Reserve Bank governor himself has said we’ve got no signs at the moment of there being a wage-price spiral,” Burke said. “We know inflation isn’t driven by higher wage growth because we haven’t had higher wage growth,” he said, referring to stagnant pay between 2015 and early 2022.

The current center-left Labor government took office a year ago pledging to get wages moving again.

The RBA says CPI peaked at 7.8% in the final three months of last year and forecasts it to ease to 4.5% by December and 3.2% by the end of 2024. Still, it worries that rising services prices and rents increase the risk of inflation becoming sticky.

The central bank currently estimates that real wages will resume growing — when pay gains outpace inflation — in June next year.

Burke says that’s the government’s overriding goal. “We want to get to the point where those lines cross because when those two lines cross and wages start to get in front of inflation again, that’s when people start to get ahead.”