Australian Bonds Plunge on Hawkish FOMC Minutes

Australian Bonds Plunge on Hawkish FOMC Minutes

19 May 2016, 08:20
Roberto Jacobs
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Australian Bonds Plunge on Hawkish FOMC Minutes

The Australian government bonds plunged on Thursday after minute release from the April FOMC meeting that indicated policymakers were in support of a move to raise rates in June if the economy supported it. The yield on the benchmark 10-year Treasury note which moves inversely to its price rose 7bps to 2.374 pct and the yield on the 2-year Treasury bond jumped 4bps to 1.680 pct by 0525 GMT.

The FOMC in its April 26-27 meeting minutes indicated that most judged it would likely be appropriate to hike in June if data remains consistent with Q2 GDP pickup, firmer labour market conditions and progress on inflation. Some concerned that markets may not have accurately assessed the chance of a June hike and policymakers expressed a range of opinions on whether there would be enough incoming data before June 15 meeting to warrant a hike. Some judged outlook as now roughly balanced, many others continued to see downside risks and few saw it as appropriate to hike in April, two worried that US behind the curve on inflation. May expressed confidence that US growth would pick up in coming quarters but some saw risk that a more persistent slowdown underway and generally saw risks from global and financial developments as having diminished but still warranted close monitoring. Some participants noted that global financial markets could be sensitive to the upcoming British referendum on membership in the European Union or to unanticipated developments associated with China's management of its exchange rate.

In terms of inflation, the incoming information on inflation over the intermeeting period showed that the earlier declines in energy prices and falling prices of non-energy imports were still contributing importantly to low headline inflation. Additionally, despite the recent rise in core inflation, some participants continued to see progress toward the Committee's 2 percent inflation objective as likely to be gradual. They noted that, as they had expected, the March CPI data showed that the high monthly readings on some components of core prices in January and February were transitory, and that the March CPI data suggested that the 12-month change in core PCE prices likely moved down in March. Several commented that the stronger labour market still appeared to be exerting little upward pressure on wage or price inflation. Nevertheless, most participants continued to expect that, with labour markets continuing to strengthen, the dollar no longer appreciating, and energy prices apparently having bottomed out, inflation would move up to the Committee's 2 percent objective in the medium run.

On balance, these minutes go a long way in uncovering sentiment not very much reflected in the April FOMC statement. On balance, this release should go a long way in making the June meeting a live event, something that was seen as less likely in the wake of the April meeting. However, given the need for data to cooperate as the meeting approaches, nothing is certain. Nevertheless, we continue to expect only 50bps worth of tightening from the FOMC in 2016, regardless of whether or not they choose to act in June.

Moreover, Australia’s economy added jobs in April and the unemployment rate held at a 2 1/2 year low as the number of people in part-time roles increased. April employment change rose 10.8K, below markets expectation of +12k, with the unemployment rate remained unchanged at 5.7 pct, lower than the market consensus of 5.8 pct, from prior 5.7 pct. We foresee that April's Australian labour market data are unlikely to incite the RBA to take after May's rate cut with another reduction at the following meeting in June.

The benchmark Australia's S&P/ASX 200 index was trading down 0.70 pct, or 37.5 points, at 5,324.5 by 0525 GMT, on tumbling crude oil prices.

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