Morning Report

Key themes: US equities finished lower, pulling back from a rally that briefly drove the Dow Jones to a record high.

A number of hawkish Fed speakers suggested that the Fed is in no rush to cut interest rates. This saw US bond yields increase. The US dollar also advanced.

The Aussie finished lower. The larger than expected increase in the unemployment rate triggered a sell off which continued in overnight trade.

Share markets: US equities finished lower, pulling back from a rally that briefly drove the Dow Jones over 40,000 for the first time. The Dow Jones closed just under this historic high, closing 0.1% lower.

The S&P 500 closed 0.2% lower, while the tech-heavy Nasdaq slipped 0.3%.

The ASX 200 was 1.7% higher. The higher-than-expected increase in unemployment spurred hopes for rate cuts this year driving the market higher. Financial stocks led the market higher, with ten of eleven sectors finishing in the green.

Interest rates: US bond yields were higher. This was driven by some resilence in the economic data release overnight and hawkish Fed speakers.

The 2-year bond yield increased by 7 basis points to 4.80%. The 10-year treasury yield increased by 4 basis points to 4.38%.

Interest-rate markets continue to price a full rate cut by November. For 2024, the market is pricing in around 45 basis points of cuts – slightly less than two 25-basis-point moves.

Australian yields were also higher. The 3-year government bond yield (futures) was up by 2 basis point to 3.85%. The 10-year government bond yield (futures) was up by 4 basis point to 4.23%.

Foreign exchange: The US dollar advanced ,supported by higher yields. The DXY index fell to a low of 104.08, before receiving yield support and reaching a high of 104.63. The DXY Index is trading at around 104.50.

The Aussie fell sharply following the labour force release and continued to slide in overnight trade, reaching a low of 0.6654. The pair is now trading at around 0.6677.

Commodities: Commodities were generally higher. Copper, oil, coal, and iron ore were higher. Gold was lower.

The West Texas Intermediate (WTI) futures is currently sitting at around US$79.37 per barrel.

Australia: Employment rose by +38.5k (0.3%) in April, stronger than Westpac’s forecast for +20k and the market consensus for +23.7k. This follows a volatile opening quarter, with gains ranging from +11.6k in January, to +118.2k in February and –5.9k in March.

Labour force participation was a little stronger than expected, with the participation rate moving higher from 66.6% in March to 66.7% in April. That implies an appreciable lift in the size of the labour force, up +68.8k. Given the +38.5k lift in employment, that means there was a rise in the number of unemployed persons (+30.3k), which saw the unemployment rate move from 3.9% to 4.1% (4.05% to two decimal places).

The total number of hours worked has been soft over the last year, notwithstanding the increase in the number of people employed. This continued in April, with the number of hours worked remaining unchanged compared with March. In annual terms, hours worked declined by 0.1%. This was the first annual decline since the pandemic (February 2021).

Labour demand has certainly cooled over the past year, but it has only translated into a gradual softening in employment growth. Easing labour demand appeared more clearly in average hours worked over the second half of last year. We continue to anticipate that conditions will gradually soften over the course of this year, as employment growth continues to soften, and the unemployment rate ticks up to a quarter-average of 4.3% by year-end.

Japan: Preliminary data showed economic activity declined 0.5% over the March quarter. This was worse than the decline of 0.3% the market was expecting. Activity over the December quarter 2023 was revised lower, to essentially a flat outcome compared with growth of 0.1% initially estimated.  Private consumption fell for the fourth straight quarter in March, as consumers continued to be squeezed by cost-of-living pressures. Capital expenditure also fell due to the reduction of motor vehicle production. Net exports were also a drag on activity, with exports falling by more than imports.

Industrial production in Japan increased by 4.4% month-over-month in March 2024, compared with flash data of a 3.8% rise and after a 0.6% fall in the prior month.

Industrial production increased 4.4% over the month of March, higher than the preliminary estimate of 3.8%. This follows declines of 0.5% in February and 6.7% in January.

United States: Initial jobless claims fell to 222k over the week ending 11 May. This was a higher than the 220k the market was expecting. Continuing claims rose to 1.794m, higher than the 1.780m the market was expecting.

Housing starts rose 5.7% to an annualized rate of 1.36m in April. This was slightly below the 1.42m starts the market was expecting.

Building permits fell by 3% to an annual rate of 1.44m in April. This was the lowest level since December 2022 and below market expectations of 1.48m.

The Philadelphia Fed Manufacturing Index fell to 4.5 index points in May, from 15.5 points in April. This was well below the 8.0 points the market was expecting.  The index for new orders and shipments fell sharply. The price indices remain below their long-run averages. 7.8 p (est. 7.8, prior 15.5). Industrial production was flat (est. +0.1%, prior revised from +0.4% to +0.1%). Import prices rose 0.9%m/m and 1.1%y/y (prior 0.6%m/m and 0.4%y/y).

Industrial production was flat in April, following a downwardly revised 0.1% (from 0.4%) increase in March. This was lower than the 0.1% gain expected by the market. Manufacturing output, which makes up around 80% of total production, fell 0.3% over the month of April.

Import prices rose 0.9% in April, accelerating from an upwardly revised 0.6% gain in March. Prices for fuel imports advanced by 2.4%. Export prices rose 0.5% in April, accelerating from the downwardly revised 0.1% increase in March. It was the fourth consecutive increase in export prices, driven by a 0.7% jump in non-agricultural exports.

Several Fed speakers indicated that policy settings were right for the time being, given the economy continues to hold up well and the labour market remains resilient.

Both Loretta Mester (Cleveland Fed President) and John Williams (New York Fed President) believe policy is in a “good place” with Mester stating “incoming economic information indicates that it will take longer to gain that confidence. Holding our restrictive stance for longer is prudent at this point as we gain clarity about the path of inflation.”

Thomas Barkin (Richmond Fed President) said “To get to 2% sustainably in the right kind of way, I just think it’s going to take a little bit more time”.