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Saturday, 8 June 2019

Rate hiking cycle crashes & burns

Losing momentum

One of the most important releases of the global calendar, the US nonfarm payrolls, confirmed things are turning back down in the face of slower growth and trade war concerns. 

Earlier in the week there had been a similarly weak indicator from a private payrolls report.

Nonfarm payroll employment increased by just +75,000 in May 2019 according to the Bureau of Labor Statistics, and critically there were also substantial downwards revisions to March (-36,000) and April (-39,000). 

Combine a weak monthly gain of +75,000 with a combined revision of -75,000 and you get...not very much, although at least this did mark a record 104 consecutive months of gains. 

The 3-month average gain is now just above +150,000, having been above +200,000 for much of 2018 and 2019. 

The unemployment rate held steady at 3.6 per cent.

But annual average hourly earnings growth slowed to +3.1 per cent.

The wrap

A couple of Antipodean observations.

Firstly, hard though it is to imagine, markets are pricing a 4 in 5 chance of the Fed cutting interest rates as soon as July(!). 

And secondly, looking at unemployment rates from Japan to Germany, Netherlands, the US, UK, Taiwan, and South Korea - all 4 per cent or considerably lower in many cases - it's not hard to imagine that Australia's NAIRU could be much lower than previously assumed. 

For that reason and others, markets are now pricing in two further rate cuts in Australia over the next 12 months.

I was travelling yesterday and didn't get around to posting the pre-election housing finance figures, which showed a small uptick for homebuyers and a decline for investors.

Speaking with a few mortgage brokers yesterday, there has been a surge of enquiries since the election, and especially now interest rate cuts are being passed on.

Importantly, while banks were previously taking up to a couple of months to return documentation, not the figure is back down to about a week, so things are 'back to normal' in that regard.