Stocks lift slightly as yields fall; the week now reaches a climax

Stocks in Europe and the US edged higher overnight, albeit on lower activity.

Source: Bloomberg

Entering the week’s climax

Stocks in Europe and the US edged higher overnight, albeit on lower activity. It was a matter of stocks rising as government bond yields fell, as a softening global economic outlook prompted traders to increase bets of global rate cutes – especially by the US Fed. The economic news-flow was quite light, but headlines were dominated by reports of an attack on a US oil tanker in the Persian Gulf – purportedly organised by Iran. That gave oil prices a bounce. Overall, markets reach the climax for the week, as attentions shifts a big day of Chinese economic data today; and the release of US Retail Sales data tonight.

Australia’s mixed jobs report

Australian employment data was in focus yesterday, and all-in-all it revealed a labour market in a mixed state. Recall: it was a perceived deterioration in labour market conditions that provided the final justification for the RBA to cut interest rates last month, with yesterday’s release being followed and judged on whether it could possess similar significance. The headline number was seemingly positive development: the economy added 42.3k jobs last month, well above the 16k estimate. However, in what was a dampener on the overall release, the unemployment rate printed above economist expectations at 5.2%, mostly due to a climb in the participation rate to 66.0%.

Signs of persistent “spare capacity”

As always, it was the fine print that contained the richest kernels of information. Remember: for the RBA, the labour market right now is all about “spare capacity”. That is: how much of it exists, and how likely is it to drag on future wages growth, consumption and price inflation. And if yesterday’s print is anything to go-by, there remains ample capacity in the labour market for the justifiably cut rates again in the near future: almost 40k of the jobs added to the Australian economy in May were part-time roles; and the underemployment rate climbed last month to 8.5%.

Bets of an RBA rate cut increased

What this means fundamentally is that the lift in wages – and inflation, and consumption – that the RBA is looking for may remain elusive under current policy settings. As such, market participants have increased, very marginally, the implied probabilities of rate cuts from the RBA in the coming months. A cut at the next RBA meeting is currently considered a higher than 60% chance now. Furthermore, a full-rate cut is priced-in by August; with another full 25-basis points of cuts priced into the market from the RBA before the end of this year.

Bonds and currencies re-act

If that were to materialize, it would put the cash rate at 0.75% by December. The prospect of a cash rate at that level has manifested along the Australian Government bond yield-curve, and at that, in the Australian Dollar. The 3-Year Australian government, for one, clocked up an ignoble milestone yesterday, hitting an all-time low yesterday, plunging below the 1.00% mark for the first time. The Australian Dollar also made its way back towards the 0.7000 handle, as the spread between US and Australian government bonds widened, with differential between the US and Australian 2-year notes expanding to 84-points.

ASX closed flat yesterday, should open flat today

Despite the fall in risk-free rates, the ASX 200 failed to capitalize on the fall in interest rate expectations. That can be chalked up to global factors as much as anything else: sentiment remains subdued amid persistent concerns about the trade-war and global growth. As such, the materials sector dipped, courtesy in-part to a stall in the rally iron prices, and the energy sector subtracted 8-points for the index, tracking a recent, precipitous fall in global oil prices. Overall, the day ended practically flat, with neither the bulls or bears controlling price right now. And today ought to be similar: SPI Futures are pointing to a small advance at-the-open.

Jobs numbers raises questions about consumer

The area of real relevance yesterday was the performance of the consumer discretionary sector. It was one of the ASX 200’s big laggards, shedding 2.50% during local trade. Up until recently, the power of implied rate cuts had supported a strong upward trend for the sector, on the view that lower rates will unshackle consumption in the Australian economy. Yesterday’s employment data, however, had the opposite impact. Fears of ongoing softness in the labour market weighed (marginally) on the outlook for local consumption; which subsequently drove the ASX 200’s consumer-discretionary sub-index towards the supportive trendline it has honoured since the beginning 0f 2019.


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