The Australian government bonds strengthened Friday on rising expectations for further Reserve Bank of Australia (RBA) easing in the up-coming policy meeting. The yield on the benchmark 10-year Treasury note which moves inversely to its price, fell 6bps to 2.304 pct and the yield on the 2-year Treasury bond dipped 3bps to 1.641 pct by 0540 GMT.
Report from the Australian Bureau of Statistics on Thursday showed Australia's jobless rate came in unchanged at 5.7 pct in April, compared to median forecast for a rise to 5.8 pct. The bureau said its seasonally adjusted workforce participation rate fell to 64.8 pct in April from 64.9 pct in March, below consensus expectation of 64.9 pct. 10,800 jobs were added in the month versus expectations of 12,000. The reading for March was also revised down, from 26,100 to 25,700. Full time employment fell 9,300, while part-time jobs rose 20,200. Despite some slowdown in momentum in jobs growth, the stability in the unemployment rate at 5.7% suggests that the labour market remains in good shape. The lack of wage pressure has helped provide an underpinning to a surprisingly resilient labour market. Data earlier this week showed that Australian wages grew at a mere 0.4 percent in Q1, their slowest pace on record last quarter. Deceleration in wages growth leads to reduced cost pressures for businesses and hence ongoing downwards pressure on inflation.
The Reserve Bank of Australia is likely to look through a resilient labour market report which will probably see no significant monetary policy implications. Speculation is high that the RBA will cut interest rates further in coming months. Cash rate futures currently put the odds of a further 0.25% rate cut from the RBA in August at 73%, unchanged from earlier in the session.
We forsee that the April Labor Force report demonstrated that labour market situations stayed stable, however momentum has hindered. In spite of the fact that labour market pointers are to some degree blended, we keep on expecting the unemployment rate to stay near the current 5.7% for whatever remains of the year. The employment numbers are unrealistic to change the RBA's perspective on the policy outlook; its focus is solidly tilted towards inflation. The RBA recently significantly downgraded its desire for underlying inflation. The RBA is as of now expecting core inflation to stay around 1-2 pct over 2016 and to get to 1½-2½ pct toward the end of the conjecture time frame. Such a low inflation profile implies further easing is totally guaranteed and we expect another 25bp cut, probably in August.
The Reserve Bank of Australia in its quarterly statement of monetary policy concluded that the May policy easing was based on lower weak inflation outlook, supported by cooling housing sector. Said cuts in inflation and Gross Domestic Product (GDP) forecasts are mostly unchanged, year average for 2016 revised up 0.5 ppt. Said underlying inflation seen at 1-2 pct towards the end 2016, from previous forecast of 2-3 pct, 1.5-2.5 pct out to mid-2018, from previous 2-3 pct. They further added that GDP seen at 2.5-3.5 pct end 2016 out to end 2017, 3-4 pct to mid-2018 and Consumer Price Index (CPI) data showed broad-based weakness in domestic cost pressures, slow growth in labour costs, outlook for wage growth revised lower, to stay low for longer and then rise very gradually. RBA also cites that retail competition, softer inflation in rental & home building, falling fuel & utility costs and inflation expectations in Australia below average, but have not declined as much as elsewhere. Said outlook for domestic cost pressures, impact of AUD on inflation are key uncertainties and unemployment seen around current rate to mid-2017, before declining gradually. Furthermore, Q1 GDP growth seen around same moderate pace as previous quarter and household consumption to be a bit above average, net exports will continue to add to GDP and outlook assumes recent rises in bulk commodity prices are not sustained. Most of decline in mining investment to be over by end 2016, non-mining still subdued, they added.
The Melbourne Institute Survey of consumer inflationary expectations declined 0.4 pct to 3.2 pct in May. The survey is a representation of the consumer’s view of price stability over the next 12 month period. The sentiment displayed by the interviewed consumers mirrored recent data events we have seen from Australia. It was just over 2 weeks ago, that we saw a significant deviation on CPI, which came in 0.5 percentage points below expectations and 0.6 percentage points below its previous reading. Some economists have forecasted that continued pressure on inflation, and inflation related data, could see the RBA take further action.
On the contrary, future course in bond prices are likely to be ruled by the movements in the crude oil market. Meanwhile, the International benchmark Brent futures rose 0.72 pct to $49.16 and West Texas Intermediate (WTI) climbed 1.08 pct to $48.68, the benchmark Australia's S&P/ASX 200 index was trading up 0.39 pct, or 21 points, at 5,359.5 by 0540 GMT.
