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Interest Rate & Market Commentary for Week Ending 6th June 2025

 

Weekly Overview

Cracks emerged in the US employment market this week. On Thursday, applications for US unemployment benefits unexpectedly rose last week to the highest since October, adding to signs that the job market is cooling. Initial claims increased by 8,000 to 247,000 in the week ended May 31, a period that included Memorial Day. The median forecast in a survey of economists called for 235,000 applications. Weekly claims tend to be volatile and fluctuate even more around holidays. However, recent data and surveys pointed to a slowdown in economic activity and sustained gains in benefit filings in the coming weeks could be a sign that layoffs are on the rise.The four-week moving average of new applications, a metric that helps smooth out volatility, rose to 235,000, also the highest since October.

On Friday, the all-important US nonfarm payrolls was released. Job growth moderated in May and the prior months were revised lower, indicating employers are cautious about growth prospects as they weigh the Trump administration’s economic policy. Nonfarm payrolls increased 139,000 last month after a combined 95,000 in downward revisions to the prior two months. The unemployment rate held at 4.2%, while wage growth accelerated. Employers have been ‘hoarding labour’ in the face of massive corrosive uncertainty. It costs money to fire workers, and we believe firms have been reluctant to lay off workers until they saw the extent of the Trump tariffs. Lessons were learnt during Covid.

But dig deeper. Cracks in the façade of labour market resilience are now starting to show and the longer the tariff uncertainty and government spending cuts continue the worse the labour market reports are bound to be.The advance in payrolls reflected strength at service providers, including health care and social assistance as well as leisure and hospitality The latter is a seasonal market. Furthermore, the household survey, showed a 254,000 increase in the number of people who went from employed to out of work during the month. That was the biggest rise since the start of 2022. 

Regarding figure 4, the CME FedWatch Tool forecasts the probability of a rate hike (or rate cut) at upcoming FOMC meetings, allowing market participants to gauge the likelihood of changes in interest rates and the direction of the Fed’s monetary policy.You can see why the 2-year bond jumped 12 bps on Friday.

Overview of the US Treasuries Market

 Over the week, Thursday and Friday were the big movers. It was all employment data driven and yield over both days moved up circa 14 bps. The 2-year got slammed on Friday, for reasons we will get into.

On Friday, treasuries slumped after stronger-than-expected US job and wage growth prompted traders to trim bets that the Federal Reserve will cut interest rates this year. The Friday selloff lifted yields across maturities by as much as 12 bps, led by shorter-dated tenors more sensitive to Fed rate changes. The benchmark 10-year note’s rate rose 12 bps to 4.51%, and yields across the spectrum once again exceeded 4%. Interest-rate swaps showed traders now see a roughly 70% chance of a quarter-point rate cut by September, compared with a probability of about 90% on Thursday. The amount of easing priced in for the year declined to about 43 bps, fewer than two quarter-point cuts. See Figure 11. US job growth moderated in May and the prior months were revised lower, indicating employers are cautious about growth prospects as they weigh the Trump administration’s economic policy. Nonfarm payrolls increased 139,000 last month after a combined 95,000 in downward revisions to the prior two months. The unemployment rate held at 4.2%, while wage growth accelerated. Employers have been ‘hoarding labour’ in the face of massive corrosive uncertainty. It costs money to fire workers, and we believe firms have been reluctant to lay off workers until they saw the extent of the Trump tariffs. Lessons were learnt during Covid.

But dig deeper. Cracks in the façade of labour market resilience are now starting to show and the longer the tariff uncertainty and government spending cuts continue the worse the labour market reports are bound to be. The advance in payrolls reflected strength at service providers, including health care and social assistance as well as leisure and hospitality (see Figure 2). The latter is a seasonal market, so the read we’d say is not as solid as it may have appeared at a headline level. On that front, industries that are more exposed to tariffs flashed warning signs. Manufacturing payrolls dropped 8,000 last month, the most this year, while employment growth in transportation and warehousing rose slightly after declining in each of the prior two months. Employment at temporary-help agencies fell by the most since October.

Furthermore, the household survey, showed a 254,000 increase in the number of people who went from employed to out of work during the month. That was the biggest rise since the start of 2022. Another major question for economists and policymakers is the extent to which Trump’s efforts to cut back on government spending will take a toll on employment. The federal government shed 22,000 jobs in May, the most since 2020. Economists contend that at least half a million US jobs could be on the line as federal spending cuts spread to contractors, universities and others who rely on public funding.

Cracks in employment and wage growth – the Fed remains very much ‘wait and see’. Forget about Trump’s exhortation for a 100 bps cut – they are not even thinking 25 bps currently. And indeed that is what the markets are reflecting.

Regarding figure 12, the CME FedWatch Tool forecasts the probability of a rate hike (or rate cut) at upcoming FOMC meetings, allowing market participants to gauge the likelihood of changes in interest rates and the direction of the Fed’s monetary policy. You can see why the 2-year bond jumped 12 bps on Friday.

The good news – on Thursday Japanese government bonds rose after an auction of 30-year debt wasn’t as bad as many investors had feared, with yields edging lower after the sale. Despite the relief, the bid-to-cover ratio of 2.92 points to a general lack of appetite for longer-maturity debt, and supply and demand concerns for super-long bonds remain. Several auctions of longer tenor Japanese bonds in recent weeks have met shaky demand, with the market flashing a warning that authorities in Tokyo may need to reconsider their issuance plans. The Ministry of Finance is set to meet with primary dealers on June 20, according to people familiar with the matter, just days after the Bank of Japan reviews its bond buying plans.

On that topic, the US Treasury is set to sell $22 billion of 30-year government bonds this Thursday, which will be closely watched as a test of market sentiment amid investor pushback against long-term government debt. All longer dated auctions are being viewed through the lens of a test of market sentiment, and it feels like US Treasury 30 years are the most unloved bonds out there.”

Figure 14 essentially depicts a story of a deteriorating risk-return profile on longer-dated US Treasuries given the ballooning debt reality.

Overview of the Australian Government Bond Market

Over the course of the week the Australian 10-year gained 5 bps to 4.34%.

On Wednesday and on RBA speak, according to RBA Assistant Governor Sarah Hunter it expects global trade uncertainty will weigh on the domestic economy and employment, helping explain policymakers’ surprise switch to a dovish stance last month. “The baseline forecast is for recent global developments to contribute to slower economic growth in Australia and a slightly weaker labor market,”. Sarah Hunter added that the RBA expects the price of tradable goods will be “slightly dampened” too. The comments underscore the RBA’s shift in focus to downside risks to growth from the Trump administration’s tariff regime after it wrapped up a three-year campaign to rein in inflation. Money markets are now pricing in three more RBA cuts this year.

More broadly, bonds in Australia are getting a lift as questions about the appeal of US Treasuries send investors toward top-rated alternatives. Strategists and portfolio managers are re-examining whether Treasuries offer enough compensation, a rare challenge to the world’s largest bond market after a recent ratings downgrade and fears that a proposed tax bill may hit foreign investors. And that is just the fiscal risk. Taiwanese insurers recently got crushed on FX moves. They are making plans to back away from dollar assets, while Hong Kong pension funds have been told to draw up contingency plans for a further downgrade of the US. One large Taiwanese insurer has already begun building a small position in top-rated Australian and UK corporate bonds to diversify from US dollar-denominated assets. And that is just a sliver of what Asia is thinking of when it comes to somewhat stepping away from US assets – they are heavily exposed.

All of the recent ructions in the US are adding to the appeal of the world’s dwindling supply of AAA rated bonds. The spread between Australian 30-year bonds and equivalent US Treasuries is around its narrowest level in a year, a sign that investors are putting more of their money into the Australian debt. The gap between the same maturity bonds from Singapore and the US is near a record discount. And, by the way, should we add the trajectory of easing – it will be well ahead in Australia vs. the US. In Figure 1 below this is evident by the spread moving into the positive. In Figure 2, evident in the negative. The technicals in Australian bonds were robust already, and leading to tight spreads. Foreign investors in Australia’s government bond market are set to face competition from local pension funds, whose demand for Aussie notes may outpace issuance. Only Singapore offers a comparable option in the SE Asian market. This is a bigger topic we have been noting – how the private markets are leading to shrinkage in the public markets and how (passive) ETF and Super flows are compressing valuations in bonds and equities alike. On that basis taken in isolation, tight spreads are likely to persist.

On Thursday, weaker-than-expected GDP data reinforced the case for further monetary easing by the RBA. The Australian economy expanded by 1.3% in the first quarter, the same pace as in the previous quarter but lower than the expected 1.5% growth. The soft growth was attributed to declining public spending and weakened consumer demand and exports.

Concluding Remarks

Friday nonfarm payrolls was the key data point last week. While the headline appeared to show labour market resilience, a deeper dive suggests that cracks may be starting to show. And we suspect to date that employers have been ‘hoarding labour’, awaiting greater certainty in what is a very uncertain environment.  

Charts of the Week

The two charts below illustrate the US markets remain expensive and the equity risk premium is currently very tight. The rally has pushed the equity risk premium on the S&P 500  – the difference between the market’s earnings yield (currently 3.54%) and the risk-free 10-year bond yield (currently 4.21%) to -0.91%, the lowest level since October 2009 (bar December 2024 – January 2025). Over the last ten years up until mid 2022, the equity risk prmium was averaging a little over 2%. Investors are still expecting S&P 500 earnings will grow by between 9% and 10% in 2025, and between 13% and 14% across 2026 and 2027. That suggests that returns on equity and profit margins, already at historically high levels, will actually improve from here.

Market Summary Table

Name	Week Close	Week Change	Week High	Week Low
Cash Rate%	4.1
3m BBSW %	3.7303	-0.069	3.808	3.7303
Aust 3y Bond %*	3.489	-0.140	3.3636	3.476
Aust 10y Bond %*	4.453	-0.022	4.515	4.41
Aust 30y Bond %*	5.159	0.048	5.169	4.943
US 2y Bond %	3.9446	0	4.017	3.968
US 10y Bond %	4.505	0.093	4.597	4.475
US 30y Bond %	5.013	0.139	5.089	4.941
iTraxx	67	0	71	67
$1AUD/US¢	64.62	0.38	64.66	63.95

Looking Ahead: Major Economic Releases for the Week Ended 13 June

Last week was dominated by US labour market data.This week is dominated by the other side of the Fed mandate – inflation.Additionally, and of course related to both prices and employment, is sentiment data, both in Australia and the US. In Australia, the two key monthly sentiment indicators are out – the Westpac Consumer Sentiment and the NAB Business Survey.

Major Economic Releases for the Week ended 13 June, 2025

Date	Country	Release	Consensus	Prior
Monday, 9/6	US	Wholesale Inventories	n/a	n/a
Monday, 9/6	US	NY Fed Inflation Expectations May YoY	n/a	3.63%
Tuesday, 10/6	Australia	Westpac Consumer Sentiment June	n/a	92.1
Tuesday, 10/6	Australia	NAB Business Survey May	n/a	-1, 2
Tuesday, 10/6	US	NFIB Small Business Optimism May	n/a	95.8
Wed, 11/6	US	Consumer Price Index (NSA, YoY)	2.31%	2.39%
Thursday, 12/6	Australia	MI Consumer Inflation Expectations YoY	n/a	4.10%
Thursday, 12/6	US	Producer Price Index (NSA, YoY)	2.41%	3.39%
Friday, 13/6	US	Michigan Consumer Sentiment	52.2	53.3

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