What was missed in last weeks jobs data | Economic update

The Australian employment data released last week was unequivocally strong:

Employment increased 50.2k (10k expected) for the biggest increase in 4 months. This is something we expected.
Full time employment was very strong at 43.3k while part time was lower than expected at 6.8k. This would reflect workers on Victorian government projects being put back to work ahead of the end of the financial year.
The participation rate increased from 66.76% to 66.8%.
Due to the increase in the participation rate the unemployment rate increased from 4.024% to 4.058% (this is a lot less dramatic when not rounded to the nearest first decimal point).

It needs to be noted here that the economy has been strong enough to absorb the massive increase in immigration since the pandemic lockdowns were lifted.

While it is true that we don’t often comment on the UK economy, the change of government does offer a point of review. Data last week showed:

GDP growth of 0.7% in the March qtr. (was -0.3% in the previous qtr.) leaving the annual level at 0.3%.
Inflation was 2% June qtr.
Unemployment rate 4.4% (arguably still below NAIRU in a UK context).
Average earnings 5.7% pa.
Current account deficit of 3.3% to GDP.
Manufacturing and services PMI above 50.
Government debt to GDP 97.6%.

In the UK there is a risk that inflation will begin rising again shortly driven by the 5.7% rise in average earnings, still tight labour market and a new government that will increase expenditure. Let’s watch this space. In a UK context the inflationary surge, which began when the pandemic lockdowns were lifted, truly looks “transitory”.

Interest Rates

US bonds traded in a tight range with little economic data released to move yields and perhaps a focus on the RNC and what this means for US government economic policy if Republicans gain control of the White House, Congress and the Senate for the time in living memory. This selling pressure was partly offset by the equity market sell off that may gather pace this week. Our thoughts on the RNC policy announcements are considered under Macro commentary below.

Aust. 10-year yields pushed out to a 6bps premium to the US 10 year at weekend on renewed selling by investors switching back into the Yen. A small premium will also have been added because of the upwards pressure on short rates that has seen the AUD rise. Despite the strong employment data released last week the market continues to discount the possibility of an August RBA interest rate rise due to the political considerations.

Major Credit Markets

Investment Grade (IG) credit markets were not impacted by the equity market weakness that was centred on Tech stocks (NVD) and not the broader economic outlook as represented by the Russel 4000. The RNC policy announcements were seen as positive for smaller companies.

Pressure on credit margins came primarily from new issuance last week. The big issue last week was the $1.9bn ANZ 15NC10 fixed rate set at ASW+183bps. There was some switching seen between other T2 bonds to fund the expected supersize of the ANZ issue, but this resulted in only a 4bps margin expansion. Increased issuance by Australian banks over the next 10 months to meet the 1% increase in the ARPA cyclical capital buffer should see T2 margins expand even without a credit shock. Elsewhere, SMBC (Syd) issued $1bn 5-year Snr at 88bps and New York Life issued $500m at +110bps.

High Yield Markets

US High Yield (HY) spreads were slightly tighter last week given the strong moves in equity indexes. “BB” securities continue to perform however “CCC” are still weakening, the gap between these two at multi-year highs.

Hybrid margins consolidated the recent rally with the average major bank hybrid margin at 2%, a low (see discussion next page). Volume this week concentrated on longer-dated issues: NABPJ, WBCPM AN3PK and especially the most recent hybrid issue NABPK, turning well over $10m of trading in the week. In contrast, shorter-dated issues have been sold. Hence the margin curve has flattened however it was at a steepness high last week.

Australian Unity MCI’S (AYUPA) price has broken upwards after subdued trading post the recent entitlement issue. Good volume was evident during the week over $77, which gives a running yield of 9.28%. Bank of Queensland announced redemption of BOQPE rather than roll the issue, payment late August.

Listed Hybrid Market

Hybrids: The 2% barrier, a big deal?

Hybrid margins do show large variation over time. We have often discussed why: moves in credit and equity markets and major bank hybrid issuance. The chart shows the variation in the average major bank hybrid margin. The time series is back to 2013, just after the current style of hybrids began. Note the panic buying during COVID. Also note the regular dips to lows, especially the 2% margin level. With the current average major bank hybrid margin currently at 1.99%, is 2% a resistance level or a new normal? We note the average margin has bounced off the 2% level 4 times in the past 3 years. The time spent below 2% is only several days each time, the largest being 23 days in January 2023 and 10 days in late December/early January 2021. January is usually a period where there is light liquidly and strong inflows. Another such time was recently in May, where the average was below 2% for one day. Hence the average under 2% does not last long and is prone to disruption, such as a jump in equity volatility or the announcement of a new major bank hybrid issue. We are not forecasting a volatility jump but highlight the strong state of the market, similar to that currently with the equity market high, however the difference being long-term rises in equities are underpinned by GDP growth and Inflation, whereas credit markets are priced on a relative basis to previous levels.