Markets Overview
- ASX SPI 200 futures down 0.2% to 7,717.00
- Dow Average down 0.1% to 38,589.16
- Aussie down 0.4% to 0.6609 per US$
- US 10-year yield fell 2.3bps to 4.2209%
- Australia 3-year bond yield fell 6.9 bps to 3.81%
- Australia 10-year bond yield fell 6.6 bps to 4.12%
- Gold spot up 1.3% to $2,333.04
- Brent futures down 0.2% to $82.62/bbl
Economic Events
A renewed wave of anxiety gripped global markets as concern over a political crisis in France deepened, driving stocks down while spurring a flight to haven assets — from bonds to gold and the US dollar.
Traders took some risk off the table, with French shares this week losing roughly $210 billion in value — about the size of Greece’s economy — after President Emmanuel Macron called a snap election. France’s bonds were at the heart of the rout in the span, with the premium investors demand to own 10-year debt over German peers jumping by a record this week.
In the US, stocks also struggled to gain traction after a gauge of consumer sentiment sank to a seven-month low as high prices continued to take a toll on views of personal finances. Federal Reserve Bank of Cleveland President Loretta Mester said she still sees inflation risks as tilted to the upside despite welcome news in the latest data.
The S&P 500 closed mildly lower, led by a drop in industrial shares. Treasury 10-year yields declined four basis points to 4.21%. The dollar hit its highest since November. The euro was among the worst-performing major currencies against the greenback last week.
Other News
Australia’s central bank will likely hold its key interest rate at a 12-year high on Tuesday as it tries to restrain consumer prices that have been underpinned by an ultra-tight employment market.
The Reserve Bank will keep the cash rate at 4.35% for a fifth straight meeting, economists surveyed by Bloomberg predicted. The decision will be released at 2:30 p.m. in Sydney, followed an hour later by Governor Michele Bullock’s press conference.
Australia’s policy meeting follows a highly-anticipated decision by the Federal Reserve last week, when Chair Jerome Powell signaled he wasn’t in a rush to ease monetary policy even after a soft inflation report. Bullock is likely to draw on the same playbook by retaining her mild hawkish bias in acknowledgment of sticky consumer prices.
Bullock has retained maximum policy optionality this year, saying she needs to be confident that price growth is moving sustainably back to the 2%-3% target and as a result the board isn’t ruling anything in or out. The central bank forecasts inflation will only return to target late next year, an extended timeframe as it tries to hold onto post-pandemic job gains.
“We expect the RBA to comfortably maintain its somewhat hawkish hold stance,” said Carl Ang, a Singapore-based fixed income analyst at MFS Investment. “Looking ahead, we think RBA rate cuts from early 2025 onwards strikes the balance between supporting growth and controlling inflation, thus helping mitigate the risk of recession.”
That’s in line with most economists and money market pricing.
Since the RBA’s last meeting, data indicate that Australia’s economy has slowed markedly, with GDP contracting on a per-person basis, while tepid retail sales reflect downbeat consumer sentiment. Stubborn inflation and high borrowing costs are largely to blame.
At the same time, the labor market remains tight with unemployment at 4%, giving policymakers optimism that they can engineer a soft landing.
“An unambiguously strong jobs report has further strengthened our conviction in higher-for-longer,” said Micaela Fuchila of Bank of America Corp. “While the labor market is still in great shape, the economy has continued to weaken. The bank will focus on the impact of fiscal policy on growth and employment before thinking of easing, in our view.”
Government income-tax cuts and cost-of-living rebates on power bills to Australia’s 10.4 million households will begin on July 1. Bullock expects consumers will either save the extra cash or put it toward mortgage repayments, rather than spending. She doesn’t anticipate the stimulus will have a material impact on the RBA’s inflation forecasts.
“If you hand someone $300 and say ‘here’s $300,’ I think psychologically, they think of that differently,” she told lawmakers during parliamentary testimony earlier this month. The energy bill rebate “is helping people who clearly are hurting at the moment, but I don’t think it’s material in terms of our forecast for inflation.”
(Bloomberg)
