Ahead of the Reserve Bank’s interest rate decision later today, a new all time record low was established yesterday for the key benchmark 10 year bond – 2.16%.
Yields on two year and five year bonds also fell sharply as traders adjusted their thinking in the wake of the very weak May jobs report in the US.
The previous low for the 10 year security was 2.22% set a couple of weeks ago.
Helping drop the yield (by raising the price of the bond) was the belief the weak jobs report has forced the US Federal Reserve not to lift its key interest rate at next week’s two day meeting, or perhaps at the July meeting, a belief that was reinforced overnight by a speech from fed chair, Janet Yellen.
September now looms as the best bet, at the moment.
While Ms Yellen provided a generally positive outlook for the US economy, she described the sharp slowdown in job creation reported last week as “disappointing” and “on balance concerning”.
Analysts took this to mean the Fed will now sit tight and wait for more data as it tries to determine how important the jobs setback actually is. The June jobs report in early July looms as the next big bit of US data for the Fed to consider because by then we will have known the result of the Brexit vote in the UK on June 23.
Ms Yellen added to the suggestion the central bank was now back on hold when she described the Fed’s current policy settings as “generally appropriate”.
Ms Yellen’s worries about the employment data will lift expectations that the Fed is set to keep interest rates unchanged on June 15, as expected in markets, and will shift the focus to Federal Open Market Committee meetings later in the year.
The Fed’s September meeting is now the focus for the markets for a rate rise. But a weak jobs report for June will through that thinking out the window.
Rather than reflecting heightened anticipation of an RBA rate cut today, (the central bank will leave rates unchanged) the fall in yields is part of the broad global demand for government paper.
“The monthly labour market report is an important economic indicator, and so we will need to watch labour market developments carefully,” Ms Yellen said in her speech in the US city of Philadelphia. “My overall assessment is that the current stance of monetary policy is generally appropriate, in that it is providing support to the economy by encouraging further labour market improvement that will help return inflation to 2 per cent.”
But there were two words not in the speech “coming months”which were in a speech she made in late May at Harvard university and triggered the conversion of the last market sceptics to accepting a rate rise next week, or in July.
The Fed also remains worried about the Brexit vote in the UK which happens on June 23 and where the leave argument has edged ahead of the remain camp in some recent polls.
Yesterday’s fall in Australian rates was sparked by US treasuries on Friday night, with yields tumbling on Friday (1.70% for the US 10 year bonds, down 10 points, a big one day movement) in the wake of an unexpectedly weak US jobs report that have reduced the likelihood of the Federal Reserve raising interest rates at the conclusion of its June 14-15 policy meeting.
Ms Yellen’s comments overnight saw US rates edge up to just over 1.72% for the 10 year security.
The Aussie dollar jumped half a per cent to around 73.75 US cents.
Oil futures settled on Monday at their highest level since July, with ongoing supply disruptions in Canada and Nigeria helping prices more than erase last week’s losses.
July West Texas Intermediate crude added $1.07, or 2.2%, to settle at $US49.69 a barrel in New York, the . The highest since July 21 of last year.
August Brent crude tacked on 91 cents, or 1.8%, to $US50.55 a barrel in London.
Gold futures continued to rise after Friday’s 2.5% jump on the weak jobs report for May.
Comex August gold climbed by $US4.50, or 0.4%, to settle at $US1,247.40 an ounce after trading as high as $1,251.30. Comex July silver futures added 8.2 cents, or 0.5%, to $US16.447 an ounce. Last week, silver was up about 0.6%.
Wall Street finished higher, with the S&P 500 closing at its highest closing level so far this year. The index rose 10.25 points, or 0.5%, to 2,109.38. The Dow added 112.93 points, or 0.6%, to 17,920.13, while the Nasdaq Composite jumped 26.20 points, or 0.5%, to 4,968.71.
The stronger-than-expected March quarter GDP report last week has confused expectations for another Australian interest rate cut. Meanwhile, Australian jobs advertisements rose strongly last month, according to the latest ANZ job ads report.
According to the ANZ, the number of job postings increased by 2.4% to 157,942 in seasonally adjusted terms, leaving the increase on a year earlier at 9.1%. Job ads had been up more than 12% earlier in the year.
The monthly increase was the largest in percentage terms since September 2015.
