Markets Overview

  • ASX SPI 200 futures up 0.6% to 7,841.00
  • Dow Average up 0.9% to 39,908.00
  • Aussie up 1.0% to 0.6694 per US$
  • US 10-year yield fell 9.9bps to 4.3400%
  • Australia 3-year bond yield rose 0.3 bps to 3.96%
  • Australia 10-year bond yield fell 1.1 bps to 4.32%
  • Gold spot up 1.2% to $2,385.97
  • Brent futures up 0.7% to $82.96/bbl

Economic Events

  • 09:40: (AU) RBA’s Hunter-Speech
  • 10:30: (AU) Australia to Sell A$1 Billion 70-Day Bills
  • 10:30: (AU) Australia to Sell A$1 Billion 133-Day Bills
  • 11:30: (AU) April Part Time Employment Change, prior -34,500
  • 11:30: (AU) April Full Time Employment Change, prior 27,900
  • 11:30: (AU) April Employment Change, est. 23,700, prior -6,600
  • 11:30: (AU) April Participation Rate, est. 66.6%, prior 66.6%
  • 11:30: (AU) April Unemployment Rate, est. 3.9%, prior 3.8%

Wall Street traders sent stocks to all-time highs as bond yields slumped after an inflation slowdown reinforced bets the Federal Reserve will cut interest rates as early as September.

The S&P 500 notched its 23rd record in 2024 as data showed the consumer price index cooled for the first time in six months. Wall Street’s “fear gauge” — the VIX — sank to the lowest since January. Treasuries climbed across the US curve. Fed swaps priced in a faster pace of policy easing this year. The dollar fell against all of its developed-market peers.

The latest inflation report may offer US policymakers hope that inflation is resuming its downward trend, which would help pave the way for rate cuts. Separate retail sales data indicated some softening of the resilient consumer demand that’s been bolstering the economy.

Most major groups in the S&P 500 advanced, with the gauge up 1.2% and topping 5,300. Nvidia Corp. led a rally in chipmakers. Homebuilders jumped. The meme rally that added about $11 billion in value to GameStop Corp. and AMC Entertainment Holdings Inc. fizzled out. In late hours, Cisco Systems Inc. gave a bullish forecast.

Treasury 10-year yields sank 10 basis points to 4.34%. The latest data helped those bonds this month reverse more than half of April’s selloff. The Bloomberg Dollar Spot Index hit a one-month low.

Other News

Australia’s central bank is likely to keep interest rates elevated for longer, economists said, despite Tuesday’s budget forecasting inflation to fall back within the 2-3% target by year’s end, a result that would normally open the door to earlier easing.

The center-left Labor government’s energy rebates and rent assistance are estimated to reduce inflation by half a percentage point, taking the Consumer Price Index to 2.75% by December, from 3.6% in March. That’s about a year earlier than the Reserve Bank forecast in an update just last week.

The risk, economists say, is the government has overdone cost-of-living assistance: the A$300 ($200) power subsidy goes to rich and poor alike, meaning it could be used for consumption. It also comes on top of tax cuts that begin July 1, potentially further fueling inflation.

Most economists surveyed by Bloomberg on Wednesday reckon the budget has made the RBA’s job harder, not easier.

“The dominant risk continues to be the trajectory for inflation, the demand support from fiscal measures potentially slowing the pace of disinflation and delaying the point at which monetary easing comes into frame,” said Luci Ellis, a senior RBA official until late last year and now at Westpac Banking Corp.

Tuesday’s budget showed the government’s books would shift from being A$9.3 billion in the black in the current fiscal year to A$28.3 billion in the red in fiscal 2025, double the estimate in a Bloomberg survey. The deficit then gapes to A$42.8 billion, or 1.5% of GDP, in fiscal 2026.

Such an expansionary stance will make the RBA wary, said Shane Oliver, chief economist at AMP Capital Markets Ltd. and a veteran budget watcher. “The net effect adds to the risk of higher for longer interest rates.”

The consensus among economists is that monetary easing will begin in November, though many are now hedging that rates could stay at the current 12-year high of 4.35% until 2025. Money markets aren’t fully pricing a rate cut until May next year, by when an election must be held.
While the mechanical drop in the CPI due to the government’s policies is likely to be welcomed by voters, economists note that the RBA focuses heavily on core inflation, which smooths volatility and is likely to remain sticky irrespective of the budget measures.

Prashant Newnaha, senior Asia-Pacific rates strategist at Toronto Dominion Bank in Singapore, warned that the deterioration in the fiscal position means “the RBA hiking in the second-half of this year cannot be ruled out.”

Money market pricing still shows a slight chance of a hike in June or August.

Economists were further disappointed by the budget’s lack of a strategy to boost productivity and bring down unit labor costs. The upshot is any decline in inflation will be “artificial rather than transformational,” said Devika Shivadekar, an economist at consultancy RSM Australia.

“The RBA may be compelled to contemplate interest rate hikes, with the intention of directing the surplus funds toward mortgage repayments rather than discretionary expenditures,” she said.
Treasurer Jim Chalmers, questioned on the largess at the traditional post-budget lunch on Wednesday, said the fiscal blueprint “takes a responsible middle course” and “shouldn’t diminish all the progress we’ve made.”

 

(Bloomberg)