Australian bonds modestly lower ahead of U.S. employment report

The Australian government bonds traded modestly lower Friday as investors remained optimistic about the upcoming United States employment report, which could go a long way in bolstering calls for some policy action before year-end as the Federal Reserve remains supported by further improvement in employment conditions alongside gradually warmer inflation readings.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, rose 1-1/2 basis point to 2.183 percent, the yield on 15-year note jumped 2-1/2 basis points to 2.559 percent and the yield on short-term 2-year climbed 1-1/2 basis points to 1.675 percent by 03:50 GMT.

The September Labor Department employment situation report will be released on Friday at 12:30 GMT. Overall, we expect non-farm payrolls will increase +180k in September (market expectations are for a +175k increase), versus the +151k reading seen in August, alongside no change in the unemployment rate of 4.9% (market expectations are for a 4.9% result). Great focus will likely be paid to gains in total private employment which we expect will increase around +170k.

Beyond the headline, we expect average hourly earnings will increase +0.2% m/m, alongside an increase in weekly hours to 34.4. On balance, despite the volatility seen in recent months, we anticipate further improvement taking hold in the coming months as conditions gradually improve. Given the greater focus on what the Fed is likely to do next following liftoff in December, we anticipate the September employment report will be sufficiently strong enough to justify additional moves higher (though other factors and subsequent reports will likely keep policymakers second-guessing).

On Thursday, Australia’s trade deficit fell to 2,010 million in August, consensus expectation was for -2,300 million, revised to -2,121 million, declining from -2,410 million in July. Goods and services imports remained flat on the month (sa), with exports also unchanged m/m.

On Tuesday, the Reserve Bank of Australia in its monetary policy meeting left interest rates unchanged at 1.5 percent as it weighs the effect of past easing and the biggest-ever boom in apartment building helps underpin economic activity and jobs growth.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.50 percent lower to 5,453.5 by 03:50 GMT.