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Investors look to RBA, GDP for hike guidance


The release of first quarter GDP data and a meeting of the Reserve Bank of Australia will be keenly watched by investors eager for clarity on the trajectory of domestic interest rates after the ongoing strength of the US economy was underlined by a robust jobs report,

A bullish end to the Wall Street week after the jobs report showed the unemployment rate fell to an 18-year low of 3.8 per cent should see the Australian market start the week on an upbeat note, with all eyes trained on Wednesday's release of the latest GDP number which should confirm whether the pushing out of the next rate rise to 2019 by a growing number of economists has been correct.

Retail sales, company profits, GDP and trade data as well as a gathering of RBA policymakers top this week's markets agenda for local investors.

Australian shares are poised to open higher to start the week, buoyed by a rally on Wall Street and an easing of immediate political crises in Europe. BHP, Rio and Atlassian advanced in New York.

Wall Street leapt higher - the S&P500 Index rose 1 per cent - on optimism about the US economy in the wake of an unexpectedly bullish jobs report. More workers were hired than forecast, average hourly earnings rose faster than expected and the jobless rate dipped. ASX futures were up 34 points or 0.6 per cent. The Australian dollar was flat.

The solid wage growth being enjoyed by Americans hasn't been mirrored in the hip pocket of Australian workers, with investors expected to zero in on the RBA's comments after its board meeting on Tuesday. Alas, when the Reserve Bank of Australia's board meets tomorrow the discussion is likely to be on wage growth, which has lagged so far this year. No change is expected in the cash rate for some time yet even though the Federal Reserve is expected to lift rates this month and the Bank of Canada in July as inflation stirs.

That's also true of Australia. Employment growth here rebounded in April, helping to lift the total number of jobs created since September 2013 to more than 1.01 million. The May Labour Force report is scheduled for release on June 14.

But it is Wednesday's release of the GDP data that will be key in shaping views about the growth outlook. The economy is expected to have grown 0.8 per cent in the quarter, lifting the annual growth rate to 2.7 per cent, according to Bloomberg consensus forecasts. The economy was growing at a 2.4 per cent pace at the end of 2017.

The acceleration in growth has been supported by a strength in net exports, notably shipments of commodities like iron ore and liquefied natural gas. Growing LNG shipments should boost net exports in coming quarters.

"Evolution of low wages and inflation [in Australia] must await further such reports as well as monitoring the spare capacity in the economy including in the labour market," NAB director economics David de Garis said in a week-ahead comment.

"The statement from the RBA will be examined for any nuances and concern on global geopolitical issues and tensions as well as their review of the domestic economy," NAB director economics David de Garis said in a week-ahead comment.

"The housing market remains one focus for the monetary authorities, data suggesting that the dwelling investment outlook remains relatively solid in an environment of accelerating infrastructure spending. House prices, however, have continued to ease in Sydney and Melbourne but at quite measured and gradual rates.

"There seems little in a material sense to deflect the RBA from its view that a return of inflation to its target range will continue, if at a still-expected gradual rate," Mr de Garis said. "The RBA is also likely to make some comment on what the partial data and its analysis suggests for Q2 GDP and whether this signifies any change from their May Statement forecasts."

Local investors first though will get a raft of data to sift through this morning: April retail sales as well as first quarter reports on company profits and inventories.

Also bolstering the positive mood at the end of a volatile week was news that the President Donald Trump-Kim Jong-un summit will proceed as planned on June 12 after a high ranking North Korean official visited Trump at the White House—the clearance of those commemorative coins is proving to have been a bit rash.

The threat that Italy's political crisis would deepen receded, for now, after a new government was sworn into office. "Italy has had 68 governments since the end of World War II with an average duration of less than 15 months," Tematica strategist Lenore Hawkins noted: "the phrase Italian political crisis is arguably redundant".

Beyond the developments in Rome, there also was a smooth transition of power in Madrid, to a socialist government.

While the euro ended lower on Friday, it at least closed off its lows. The US dollar extended its bullish run. The yield on the US 10-year Treasury rose 4 basis points to 2.90 per cent, ending the week close to where it began.

What remains uncertain in a global context is the ever more protectionist approach to trade by the Trump administration. His decision to hit Canada, the EU and Mexico with steel and aluminium tariffs has put all allies of the US on notice; President Trump lashed out at criticism from Canada's Justin Trudeau.

"Cry tariff and let slip the dogs of trade war," Bank of Montreal chief economist Doug Porter said in a weekend note. "That slightly adopted phrase, from Shakespeare's Julius Caesar, dates back more than 400 years to 1601, but is somehow appropriate for this very eventful week. It seemed like each day brought a new round of havoc, in a completely different realm, resurrected from a different era."

Mr Porter said the "extreme tightness" in the US labour market sends a "stark message about the folly of trade protectionist measures".

"And tight labour market conditions are not just a US story, with each of Canada, Germany, Japan and the UK boasting their lowest jobless rates in decades," Mr Porter also said. "While we have all seen and read the articles about robots and AI stealing our jobs, the reality in the here and now is that we have a shortage of workers, not work."


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