RBA sit tight ahead of AU GDP upside surprise ASX200

There are some suggestions the weaker than expected payrolls print in April (266,000 actual vs expectations of almost 1 million new jobs) was the result of technical issues or labor supply factors rather than an indication of underlying labor market weakness.

Nonetheless another miss this month would likely raise more questions and present a setback to the timetable that the Federal Reserve can announce its plans to taper.

Expectations for May payrolls are for a 650,000 rise in new jobs, and for the unemployment rate to drop from 6.1% to 5.9%, supported by a further easing of business restrictions, offsetting the headwinds of labour supply factors.

How will markets react to another out-of-consensus payroll print?

Some care is required in defining exactly what constitutes a payroll's “beat” or a “miss”, given the multiple feeds into the print (revisions, hourly earnings, sub-components).

Hence we will work on a “miss” being +/-200,000 on either side of the consensus expectation of 650,000.

An increase of 850,000 new jobs will likely be taken as confirmation the US recovery remains on track, and lead to a more hawkish Federal Reserve and a stronger US dollar. Value stock indices such as the S&P500 should outperform the Nasdaq that traditionally struggles under the weight of higher interest rates.

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A softer than expected number of 450,000 new jobs or less will be taken by the market as an indication the Federal Reserve will remain dovish for longer and open the way for another bout of US dollar weakness. The Nasdaq should outperform value indices and gold would likely set sail towards the next layer of resistance near $1965.

Currency pair to watch during NFP: GBP/USD

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GBP/USD continues to test the layer of resistance at 1.4245/55 coming from the February high, at this point lacking the conviction to either convincingly break above or reject it.

Should Friday's US payroll data be weaker than expected and GBP/USD can cement a break above resistance at 1.4245/55, look for GBP/USD to extend its rally towards 1.4600.

Source Tradingview. The figures stated areas of the 1st of June 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

The RBA made no changes to its Yield Curve Control and Quantitative Easing policies. Notably, it included a new sentence on low wages, despite a stronger than expected recovery.

"Despite the strong recovery in the economy and jobs, inflation and wage pressures are subdued. While a pick-up in inflation and wages growth is expected, it is likely to be only gradual and modest."

Attention now turns to the release tomorrow morning of Australia’s Q1 GDP which is expected to be much stronger than expected following the release of the final partials earlier today.

Specifically, net exports will provide a smaller than expected detraction and company inventories a stronger than expected contribution. The only disappointment, a -0.3% fall in company profits, likely a reflection of lower government subsidies from programs including JobKeeper.

As such, tomorrow's Q1 GDP will likely be almost twice as strong as previously expected at +2.0% q/q, taking GDP to +0.8% above its pre COVID19 level.

Why is a stronger GDP print important?

GDP is perhaps the most closely watched single measure of an economy's momentum and overall health. Stronger than expected GDP coupled with low inflation provides a tailwind for equity markets.

Where to now for the ASX200?

As regular as clockwork, the ASX200 completed a 3% pullback in May, before briefly trading to new all-time high yesterday. Locking in a +1.93% gain for May and an eighth straight month of gains.

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As viewed on the chart below, the ASX200 has failed to break above the 7-month trend channel resistance on several previous occasions.

With this in mind, the preference is to buy pullbacks towards support at 6900, in anticipation of the ASX200 making fresh highs in the coming months.

Source Tradingview. The figures stated areas of the 1st of June 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation