Daily Flows

• Reference rates were volatile off the back of employment data released yesterday.
• Aussie 1 year swaps initially rallied by 8 basis points to 3.89% but have since risen to 4.01%.
• This movement present an opportunity to pick up elevated 1 year term deposits as banks have to reprice. Market participants should expect outright rates of +5.00% in the BBB space.
• Demand for funds have been pushing credit spreads wider in the NCD market with +45 commonplace to attract 3 month funds.

Employment Miss Gives RBA Breathing Room

• The latest employment data missed to the downside with the unemployment rate rising from 3.5% to 3.7%.
• On a two decimal point basis, the jump looked much smaller (3.54% to 3.66%) as employment growth stalled in April.
• Total employment fell 4,300 after a couple of strong months with full time going backwards while part time was up.
• Hours worked jumped suggesting there was less people working more hours over the month.
• This saw the underemployment rate drop to 6.1%.
• When combined with the wages data the previous day it is still clear that the employment market remains tight.
• However, the latest data should give the RBA a little bit of breathing room to sit and assess incoming data to see if further rate hikes are required.

Market Pricing Moves on Fed Speakers

• The market was caught on the hop last night as two US Federal Reserve Members suggested that the inflation fight isn’t over just yet.
• With the market pricing prior to the remarks lean towards an extended pause, we saw a repricing across many jurisdictions which sent reverberations further down the yield curve.
• A day earlier there was no further tightening priced into the US curve with 3 cuts prices in January 2024.
• Pricing now has a 40% chance of a move later this year with only 2 cuts now fully priced in.
• Something similar was seen in Australian expectations with the post-employment softening in expectations reversing to now have the probability of another RBA hike sitting at over 60%.
• Expectations tend to swing around more violently as we approach the turning point in the cycle so this is something we need to get used to until central banks make a clear shift in direction.