Australian Markets Weekly – US price pressures and labour market tightness

For the full details, download the full report: Australian Markets Weekly 4 June 2018

• US labour market data remains consistent with a 3.25% unemployment rate in around 12 months’ time.
• ISM inflation indicators Prices Paid and Supplier Deliveries continue to signal inflation rising sustainably above the Fed’s 2% target in 1-2 years, which should see the Fed continue to gradually increase rates (including next week). The debate is turning to whether the Fed will need to raise rates above neutral at some stage. That will depend – among other things – on the extent to which wages growth accelerates, but it’s certainly looking more likely.
• Together these influences suggest continuing upward pressure on the US yield curve. Our rate strategists expect this to flow through to longer-term Australian rates, though shorter-term yields will be range bound until the market becomes more convinced the RBA is closer to lifting Australian interest rates.
• There is therefore expected to be continuing downward pressure on the AUD from interest rate differentials given higher US yields, but assuming fairly resilient commodity prices and risk sentiment, NAB’s FX strategists still see AUD/USD ending 2018 around US$ 0.75.
• This week is a busy one for Australian data and events: it starts with the final indicators of Q1 GDP, which is published on Wednesday, where NAB and the market look for a 0.8% q/q outcome, in part reflecting a bounce back from temporary weakness in net exports in Q4.
• The RBA meets tomorrow, but little new is expected, given the Bank’s forecasts for continued but only gradual progress in lowering unemployment over time, which is in turn expected to see wages strengthen and inflation track back toward the middle of the target band. Market participants are likely to be interested in any discussion of further tightening in bank lending standards – auction clearance rates softened again last weekend and modest price declines are being recorded in Melbourne and Sydney, admittedly after a number of years of very strong growth.

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