The week ahead

The ECB cut rates and introduced aggressive expansionary measures to lift EZ growth.

The market reaction to tonight’s May non‑farm payrolls data is likely to set the tone across financial markets next week. A rise of around 215k in employment is expected, with the unemployment rate to rise slightly to 6.4%. Such an outcome would be within the Fed’s general expectation about growth trends. Markets also believe that a smaller jobs gain most probably would not derail the Fed’s next “tapering” adjustment at the 18 June FOMC meeting. US bond yields rose during the week, as the growth outlook improved, after reaching unusually low levels at the end of May.

The past week has had some interesting developments. The ECB delivered some reasonably aggressive changes to monetary policy settings aimed at lifting growth and lifting inflation over coming quarters. The introduction of negative interest rates for deposits at the ECB by the major banks was widely expected. But it is still an unusual measure and demonstrates the seriousness of the deflation pressures in the EZ. In contrast to the ECB’s measures, the Bank of England left their cash rate at a record low of 0.5% on Thursday.

In the US, in the past week, there was some confusion over the correction to the ISM data that ultimately showed a continued expansion in the US manufacturing sector. It was positive for the US growth outlook and helped to lift longer term bond yields up from their recent lows.

The data schedule in the US and Europe is relatively light and skewed towards the end of the coming week. In the US the major releases are the May retail sales and consumer confidence data. The focus will tend to be on the upcoming Fed meeting in the following week. In the EU there will be updates on industrial production and the international trade balance. The UK has employment data which, if stronger than expected, could have the markets pondering the timing of the BoE’s expected rate hike. UK markets have priced in a BoE rate hike in QII 2015.

In Australia over the past week we had updates on a large number of indicators. The major one was the QI GDP which came in at a robust 1.1% to push annual growth to 3.5%, the highest in the past two years. Our analysis is included inside. The major driver of the QI result was mining‑related exports. Over the past year, about two thirds of growth has come from that source. Other data showed a stumble in the monthly building approvals. But the pipeline of planned construction remains large and should keep adding to growth. April’s modest retail trade rise still left annual growth at just under its long term average of 5%pa. The small April trade deficit followed a string of strong, upwardly revised surpluses.

In Australia this week, the main release is Thursday’s jobs data which is expected to show a rise of 10k. The unemployment rate is forecast to stay at 5.8%. Conditions in the Australian labour market have improved and the forward looking indicators suggest jobs growth will rise in coming quarters.

In New Zealand, the RBNZ is expected to lift their OCR to 3.25% on Thursday as the inflation risks rise and economic growth lifts. The RBNZ could stay on the sidelines in following months, until December, and watch the flow of data before lifting rates again.

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