Australian bonds gain ahead of FOMC policy decision, May employment report

Australian government bonds gained on Wednesday ahead of the FOMC monetary policy decision, where the U.S. central bank is widely expected to hike its fed funds rate. Also, May employment report will in focus.

The yield on Australia’s benchmark 10-year Note, which moves inversely to its price, fell 2-1/2 basis points to 2.787 percent, the yield on the long-term 30-year Note dipped 5 basis points to 3.284 percent and the yield on short-term 2-year down 1 basis point to 2.073 percent by 03:20 GMT.

In the United States, Treasuries saw mixed performance on Tuesday but held generally tight ranges as markets both absorbed in-line CPI data for May, increasing 0.2 percent m/m on both the headline and core) and look ahead to the FOMC statement on Wednesday (accompanied by updated economic projections and followed by a press conference with Fed Chair Powell). 

The main event overnight appeared to be more of a dud as markets celebrated/observed civility between US President Trump and North Korea Supreme Leader Kim Jung-un. How lasting this calm between these leaders will remain to be seen. However, a temporary (and hopefully more permanent) removal of geopolitical tensions will be something welcome by all parties.

With respect to the FOMC, aside from the widely expected move higher for rates, bringing the upper bound to 2.00 percent, markets will pay close attention to any change in the Fed's forecasted outlook, particularly given that they were only one forecast short of calling for four rate hikes in 2018. On balance, we see this as a close call, though expect no significant change to the outlook, following recent commentary that highlighted FOMC tolerance for higher near-term inflation while also noting concerns with respect to increasingly disruptive trade policy (and rhetoric). In addition to the afternoon statement, markets also receive producer prices earlier in the session.

On Thursday, ABS will release its May employment report, the May labour force numbers will include a quarterly reading of underemployment. Despite good jobs growth over the past 18-months or so the unemployment rate remains stuck around 5-1/2 percent and underemployment is elevated. The leading indicators of employment are solid and suggest decent jobs growth over the next six months or so.

Meanwhile, the S&P/ASX 200 index traded 0.38 percent lower at 6,024.5 by 03:30 GMT, while at 02:50GMT, the FxWirePro's Hourly AUD Strength Index remained slightly bearish at -80.21 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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