US
US and Iran traded blows again overnight raising doubts about any imminent deal to end the Strait of Hormuz blockade. Crude oil prices extended yesterday’s gains, global bond yields are firmer, and USD is up against most major currencies. The US macro backdrop that backs a more restrictive Fed policy can drive USD higher.
The April JOLTS remained consistent with a stabilizing US labor market. The hiring rate fell from a two-year high of 3.5% in March to 3.2% in April. But the outlook for labor demand has improved as the job opening rate surged 0.4ppt to 4.6% in April, matching the November 2024 high. Meanwhile, the layoffs rate dipped -0.1ppt to 1.1%, still within the 1.0% to 1.2% range in place since 2023.
Today, the spotlight is on the May ADP employment report (1:15pm London, 8:15am New York) and ISM services index (3:00pm London, 10:00am New York). The Fed Beige Book will offer fresh anecdotal insights on US economic activity (7:00pm London, 2:00pm New York).
ADP private payrolls print is expected at +120k vs. +109k in April. For reference, the ADP weekly employment preliminary estimate showed private employers added an average of +35.75k jobs a week for the four weeks ending May 9.
The ISM services index is expected to improve 0.2ppt to 53.8 driven by a slower contraction in employment. The Prices Paid sub-index is seen rising 1.6ppt to 72.3, the highest since August 2022, and indicative of upside risk to inflation.
JAPAN
USD/JPY tested 160.00, raising intervention risks. Remember, Japanese authorities purchased a record ¥11.735 trillion in the period from April 28 through May 27 to stem the surge in USD/JPY. That underscores their determination to keep a lid on USD/JPY around 160.00.
Bank of Japan (BOJ) Governor Kazuo Ueda strengthened the bank’s tightening bias. Ueda noted that the recent increase in long-term interest rates appears to be attributable to a rise in market inflation expectations. He added the BOJ should be more vigilant about the risk of a significant upward deviation in inflation materializing than to downside risks to economic activity.
Bottom line: BOJ may need to tighten more than expected which is JPY positive. The swaps curve price in 86% odds of a 25bps BOJ rate hike to 1.00% at the next June 16 meeting and a total of nearly 75bps of tightening in the next twelve months.
AUSTRALIA
Australia Q1 real GDP growth was softer than expected and details point to sluggish underlying demand activity. Real GDP rose 0.3% q/q in Q1 (consensus: 0.4%) vs. 0.9% in Q4:
• Business investment was the biggest growth tailwind adding 0.7ppt to GDP driven exclusively by the expansion of data centers in New South Wales and Victoria.
• Net trade was the main drag detracting -0.8ppt from GDP growth partly because most of the equipment used to build data centers were imported.
• Household spending made a positive 0.3ppt contribution to GDP growth, largely reflecting elevated spending on electricity, gas and other fuels. Discretionary spending barely grew (+0.1% in Q1), suggesting real purchasing power may be under pressure.
RBA cash rate futures still imply one 25bps hike by year end to 4.60%. In our view, the risk is skewed towards a more extended pause in the RBA tightening cycle. First, the RBA projects real GDP growth to be below potential over the next two years. Second, the RBA cash rate at 4.35% currently sits near the top of the range of model-based central estimates of the nominal neutral rate.
AUD/USD dipped towards the middle of its two-week 0.7100-0.7200 range. Australia-US 2-year bond yield spreads suggests AUD/USD risk undershooting 0.7000 in the near-term.
