Australian Bonds Rally ahead of U.S. Employment Data

Australian Bonds Rally ahead of U.S. Employment Data

6 May 2016, 06:35
Roberto Jacobs

Australian Bonds Rally ahead of U.S. Employment Data

The Australian government bonds rallied Friday for four consecutive days as investors were cautious ahead of U.S. employment data. Also, tumbling crude oil prices drove investors towards safe-haven assets. The yield on the benchmark 10-year Treasury note which moves inversely to its price, fell 9 bps to 2.290 pct and the yield on the 2-year Treasury bond ticked down 11 bps to 1.588 pct by 0330 GMT.

The April Labour Department employment situation report will be released on Friday (1230 GMT), in which non-farm payrolls is expected to increase 200k, from prior 215k in March. Alongside no change is anticipated in the unemployment rate of 5.0 pct. On the other hand, the Reserve Bank of Australia in its quarterly statement on Monetary Policy concluded that the May policy easing was based on 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.

Moreover, The Australian bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Reserve Bank of Australia's target. Today, crude oil prices tumbled overnight on profit booking after it jumped by more than 4 pct as a huge wildfire in Canada disrupted its oil sands production, while escalating fighting in Libya threatened the North African nation's output. The International benchmark Brent futures fell 0.44 pct to $44.81 and West Texas Intermediate (WTI) dipped 0.65 pct to $ 44.03 by 0330 GMT.

On Tuesday, the Reserve Bank of Australia (RBA) lowered its policy rate by 25 bps to record low of 1.75 pct in its May monetary policy meeting held today, against expectations of no change in policy as very low inflation looks to be the primary driver of the rate cut. The RBA Governor Glenn Stevens was more dovish as compared to its last month policy statement and the RBA dropped language that inflation is close to target, suggesting there are rooms for further rate cuts if necessary. The Governor said that the commodity prices firmed noticeably from recent lows and economy continuing to rebalance after mining investment boom. He further said that judged prospects for growth would be improved by easing at this meeting and they will take a closer look and carefully monitor housing market, but present risk of lower rates in housing sector less than a year ago.

“Yields have plummeted once again in global markets and are now near the lows of recent ranges and we expect the market to tread water ahead of the US jobs data released later," said ANZ economists in a research note.

We foresee that the RBA to cut rates again by 25bps over next few months and reduce it further to be down to 1.25% by mid-2017. Meanwhile, Australia's S&P/ASX 200 rose 0.51 pct to 5,242 by 0330 GMT.

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