The morning catch up: RBA decision tomorrow; GDP figures coming; China’s slump continues

The ASX is expected to rise today as the local market continues Friday’s upward trend.

The ASX200 finished 34 points (0.48%) higher on Friday at 7,145, however, had its lowest weekly close in 10 weeks, dragged down by Consumer Discretionary (-2.21%), Consumer Staples (-1.40%), and Financial Sectors (-1.36%).

On the positive side, Materials (1.53%), IT (+1.22%) and Healthcare (0.95%) were the sectors that outperformed last week.

The Australia 200 is expected to open higher this morning at 7,218 (1.02%).

Over in the US, markets also finished the week strongly.

The Dow Jones added 700 points (2.1%) and the Russell 200 added 3.33%.

The rally came after Congress passed the Fiscal Responsibility Act.

“Confirming the resilience of the US economy, non-Farm payrolls rose by 339,000 in May versus 195,000 expected,” IG Markets analyst Tony Sycamore said.

“Providing an element of ‘goldilocks’, the unemployment rate rose to 3.7% from 3.4%, its highest level since October, while Average hourly earnings ticked down to 4.3% YoY from 4.4%.

"The jobs report did little to change the pricing for the June FOMC meeting, which closed at around 7bp or 30%. However, the July meeting is now 50% priced for a rate hike into the 5.25-5.50% range.”

The round-up

Here's what we saw (source Commsec):

US markets

Surged on Friday after a US employment report showing moderating wage growth in May indicated the US central bank may skip a rate hike in two weeks.

Investors welcomed news that the US Senate passed a bill to lift the government's US$31.4 trillion debt ceiling, avoiding what would have been a catastrophic first-ever default.

Broadcom (NASDAQ:AVGO) shares lifted 2.8% after predicting that sales tied to artificial intelligence would double this year. Shares of data developer MongoDB jumped 28% following a strong forecast. Lululemon shares soared 11.3% on strong results and a guidance boost.

Shares of Verizon Communications (NYSE:VZ), AT&T and T-Mobile US (NASDAQ:TMUS) declined by up to 5.6% on reports Amazon (NASDAQ:AMZN) (+1.2%) was in talks with the US telecoms to offer low-cost wireless services to its Prime members. Dish Network (NASDAQ:DISH) shares popped 16.2%.

The Dow Jones index rose by 701 points or 2.1%, the S&P 500 index gained 1.5% and the Nasdaq index added 140 points or 1.1%, hitting its highest level since April 2022.

For the week, the Dow lifted 2%, the S&P 500 gained 1.8% and the Nasdaq added 2%, notching its sixth straight weekly gain.

European markets

Closed higher on Friday after Bloomberg reported that China is working on measures to support its ailing property sector. The plan lifted mining, real estate and autos shares by up to 4.2%. Shares of German sportswear makers Puma and Adidas (ETR:ADSGN) rose 6.4% and 5.8%, respectively, after a strong result from US retailer Lululemon.

The continent-wide FTSEurofirst 300 index rose by 1.4% but was flat over the week.

The UK FTSE 100 index climbed 1.6% but posted a 0.3% weekly decline on stagflation concerns.

Currencies

Currencies were weaker against the US dollar in European and US trade.

• The Euro fell from US$1.0775 to US$1.0703 and was near US$1.0705 at the US close.
• The Aussie dollar slid from US66.34 cents to US66.02 cents and was near US66.10 cents at the US close.
• The Japanese yen slipped from 138.73 yen per US dollar to JPY140.07 and was near JPY139.95 at the US close.

Commodities

Global oil prices rose by over 2% on Friday alongside risk assets ahead of Sunday's OPEC+ meeting in Vienna.

• The Brent crude price rose by US$1.85 or 2.5% to US$76.13 a barrel.
• The US Nymex crude price lifted US$1.64 or 2.3% to US$71.74 a barrel.
• For the week, both contracts were down about 1%.

Base metal prices were mixed on Friday.

• Copper futures rose by 0.4% to be up 1.3% over the week following a surprise lift in Chinese manufacturing activity.
• Aluminium futures lost 1.3% but were 1.2% higher over the past week.
• The gold futures price fell by US$25.90 or 1.3% to US$1,969.60 an ounce.
• Spot gold was trading near US$1,947 an ounce at the US close. Gold was up 1.3% for the week.
• Iron ore futures added US$1.83 or 1.8% to US$106.33 a ton spurred by surprise growth in China's factory activity in May.
• Iron ore was up 0.9% in the past week.

Three things to watch for the week ahead

eToro market analyst Josh Gilbert, shares his three things to watch in Australia in the coming days.

1. RBA rate decision

Hotter-than-expected inflation data last week has tipped rate hike expectations on its head, with markets now pricing in at least one more hike from the RBA by August. The chance of that hike being handed down this week (June 6) is high, with Governor Lowe continuing his hawkish stance that he will do what is necessary to return inflation to the 2-3% target. Before the inflation print, the RBA got data they would have liked and investors' expectations for a pause jumped.

Retail Sales for April were flat, the May employment print was softer than expected, wage growth also showed signs of easing and business conditions pointed to weaker conditions. But, the inflation reading of 6.8%, jumping from 6.3% in March, puts a hike very much on the table.

However, with most of the data points showing signs of easing, the RBA may keep rates on hold to assess data for another month, in the aim that inflation does begin to move in the right direction.

The RBA has raised the cash rate to 3.85% over the past year to take the cash rate to a decade high of 3.85% and investors should expect that they aren’t done yet. This may pressure the local market, with investors not expecting this aggressiveness from the RBA.

2. GDP year-over-year

If the RBA rate decision wasn’t enough for investors this week, Gross Domestic Product (GDP) for Q1 is released on June 7th, and growth could face some significant headwinds.

Expectations are for year-over-year growth of 2.7% and quarter-over-quarter growth of 0.4%. Consumption is a key part of GDP, accounting for roughly 60%, meaning that slowing retail sales will weigh on growth locally as rate hikes from the RBA see consumers cutting back.

Net exports may also weigh on the growth reading, with a decline in the quarter whilst volatile commodity prices will add to the uncertainty. Immigration growth will be a focus of this reading given that it has helped drive Australia’s GDP for over a decade, and with Australia’s population set to grow by 2% this year, this could be the key to Australia avoiding a recession.

The RBA expects GDP growth to slow this year as higher interest rates force consumers to tighten their belts.

3. China’s slump could continue to weigh on local equities

To add fuel to the fire of a more hawkish RBA, China’s recovery losing steam may weigh on the local market. Last week’s disappointing manufacturing data has stoked investor fears of weakening demand from the world’s biggest buyer of raw materials, which has weighed on commodity prices this year.

The local materials sector has felt the full force of a recovery that has been more consumer-focused rather than manufacturing, with ASX’s second biggest sector the third worst performing in 2023. That weakness may continue as concerns grow over the expectation that China’s commodity demand could remain in decline with no real sign of imminent policy response from Beijing.

The Hang Seng index is the standout laggard of global indices this year, down by more than 7%. The key will be economic support in the form of stimulus that may help to support further downside risks. More key data is handed down from China this week with inflation and balance of trade, which should give investors more insight into the economy.

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