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Will the US labour market crack?

• Post Fed. US yields & the USD have remained on the backfoot after the Fed wasn’t as ‘hawkish’ as feared. JPY rebound also weighed on the USD.
• US jobs. AUD revival continued. US jobs in focus tonight. Reaction likely to be binary. Weaker (stronger) result set to be AUD positive (negative).
• RBA looming. RBA next Tuesday. We think the Board could discuss the merits of another hike. Diverging policy expectations are AUD supportive.

The washout across markets from yesterday’s less ‘hawkish’ than feared US Fed meeting has continued. Bond yields in Europe and the US have fallen further with larger moves at the front-end steepening curves. The policy expectations driven US 2yr rate fell ~9bps to 4.87% (the bottom end of its 3-week range) with the benchmark 10yr rate slipping back ~5bps (now 4.58%). The downward shift in bond yields supported US equities. The S&P500 rose ~0.9% with the tech-focused and interest rate sensitive NASDAQ outperforming (+1.5%). The positive start to the month is not unusual given the S&P500 has risen in May in 15 of the past 20 years. However, it hasn’t been all one-way traffic for cyclical assets with base metal prices mixed (copper -1%, iron ore +1.1%) and oil prices consolidating (WTI crude is ~US$79/brl, ~9% below its April peak but still above its 1-year average).

In FX, the pullback in US yields has exerted some more downward pressure on the USD. On net, EUR (now ~$1.0725) and GBP (now ~$1.2535) have nudged up, while JPY outperformed. USD/JPY has dipped sub ~154 to be ~4% below Monday’s multi-decade high as fears of further intervention by Japanese authorities to prop up the weak JPY, narrower yield differentials on the back of lower US rates, and paring back of extreme ‘net short’ JPY positioning combined. We think there could be more to come given USD/JPY and other crosses like AUD/JPY still look north of where fundamental drivers indicate they should be (see Market Musings: USD/JPY & AUD/JPY: A line in the sand?). And as USD/JPY is the second most traded currency pair this can act as a drag on the USD, in our view. Elsewhere, USD/SGD has tracked the moves in the USD and has declined to its lowest level since mid-April (now ~1.3545). The AUD’s revival has extended. At ~$0.6565 the AUD has retraced last Friday’s slide and is sitting at its 1-year average.

US data will be in focus tonight with the monthly jobs report (10:30pm AEST) and ISM services index (12am AEDT) due. The Fed’s Goolsbee also speaks (12:30am AEST). In our opinion, after a stellar Q1 indicators like employment intentions and the hiring rate, as well as seasonal factors suggest there are downside risks to consensus payrolls predictions (mkt +240,000) and that the US unemployment rate might tick up (mkt 3.8%). A softer set of US employment figures may revive longer-dated US rate cut pricing, which in turn could weigh on the USD.

AUD Corner

The AUD’s rebound has continued with the softer USD stemming from the fall in US yields and firmer JPY the driving force (see above). At ~$0.6566 the AUD has recouped the losses at the end of last week, with the currency back around its ~1-year average. The AUD also outperformed on most crosses, with the dip in AUD/JPY once again the exception. AUD/EUR (now ~0.6120) is near the top end of its multi-month range, as is AUD/GBP (now ~0.5240). AUD/NZD is tracking a touch above ~1.10 (its highest level since mid-2023), and AUD/CNH (now ~4.7314) is close to its 6-month average. By contrast, AUD/JPY slipped under 101 to be ~4% below Monday’s cyclical peak as lower global bond yields and steps by Japanese authorities to boost the JPY flow through. As outlined over the past few days we believe there is more downside potential in AUD/JPY with the pair forecast to fall towards ~97 over coming months.

Tonight, attention will be on the US labour market report (10:30pm AEST). Based on the markets sensitivity to shifting US interest rate expectations, AUD reaction should be binary with a weaker (stronger) result likely to see the AUD rise (fall). In our assessment, based on leading indicators, and after a strong Q1, we see downside risks to consensus forecasts for US payrolls growth and think the US unemployment rate might lift. A weaker set of US jobs figures could see markets factor in additional policy easing by the US Fed, which in turn may weigh on the USD and boost the AUD.

More broadly, we remain of the view that stickiness in domestic inflation, a resilient labour market, incoming stage 3 tax cuts, and more cost-of-living relief at the May Federal Budget point to the RBA lagging its peers in terms of when it starts and how far it goes in the next easing cycle. Indeed, we see a chance the RBA hikes rates again near-term. Given the recent run of local data we feel the RBA Board should at least discuss the merits of another rate rise at next Tuesday’s meeting. The experience of Canada and NZ where inflation is back at the top or within their target bands due to a weaker economy and higher unemployment suggests a RBA cash rate (now 4.35%) closer to where the BoC (5%) or RBNZ (5.5%) got to may be what is needed. Diverging policy expectations and Australia’s sturdier economic fundamentals should be AUD supportive (outside of AUD/JPY), in our opinion.

Market Retreat Continues as Yields Climb
Hawkish Kashkari Comments Pour Cold Water on Markets
Market Momentum Fades After US Long Weekend
No news is good news
Dollar Cruises Toward Weekly Gain on Fading Easing Expectations
Twists & turns

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