Sectors: Bonds
The RBA, like the Fed & BOE, is expected to cut rates in the near future with credit markets pricing in a cut this month, and at least two cuts in the next 6-months.
In simple terms, we believe Friday’s data has, in all likelihood, moved the proverbial goal posts after the latest employment report showed the steepest downward revisions to US jobs growth since the pandemic, offering a dramatically different picture of the labour market in recent months.
As we mentioned earlier, following Fridays weak Job Report US Treasuries rallied, with short-term yields posting their biggest drop since late 2023, after the soft data saw traders increase bets that the Federal Reserve will lower interest rates as soon as next month.
Michele Bullock’s week-to-week commentary paints the picture of a cautious but overall prudently dovish RBA, which has seen the rate-sensitive local 3s anchored to the 3.5% level.
Bond traders are increasing bets that the Fed will cut interest rates more aggressively next year, as speculation mounts that an eventual change of leadership at the central bank will deliver the easier monetary policy that President Donald Trump is demanding.
Investors are showing signs of pulling money out of government bonds and migrating into US and European company debt, traditionally a move up the risk curve.
Last week’s soft Australian employment data brought three rate cuts this side of Christmas back into play, creating a tailwind for the markets’ explosive move on Friday.
With the US job market holding up stoically the Fed have been on hold all year, much to the chagrin of President Trump, although the futures market is still pricing in two cuts by Christmas.
Yesterday’s weak employment data is important to RBA policymakers as the resilience of the labour market, and worries about it rekindling inflation, have been the key reasons why they’ve shown patience in the current easing cycle.
Yesterday saw Japanese 10-year Government bond yields rise to their highest level since 2008. The common characteristic across US, European, and Japanese long-term debt markets is that fiscal policy is carrying more weight than monetary policy in terms of determining yields.
