The Australian government bonds slumped on Tuesday after the Reserve Bank of Australia (RBA) maintained its key interest rate at a record low of 1.75%, as expected. The yield on the benchmark 10-year Treasury note, which moves inversely to its price rose more than 5 basis points to 2.208 percent and the yield on short-term 2-year bonds jumped 8 basis point to 1.682 percent by 05:45 GMT.
The RBA Governor Stevens in his monetary policy statement concluded that the Australian economy continued to grow, but at a lower than average pace. He added that unchanged policy is consistent with CPI returning to target band and global economy is also growing at lower than average pace. Said dwelling prices have begun to rise again recently and he sees inflation remaining quite low for some time. He further mentioned that several advanced economies have recorded improved conditions over the past year, but conditions have become more difficult for a number of emerging market economies. He said China's growth rate has continued to moderate, though recent actions by Chinese policymakers are supporting the near-term outlook.
We foresee that the CB is unlikely to ease while keeping the cash rate at its all-time low of 1.75% until it gets another read on inflation in late July.
Yesterday, The Federal Reserve Chair Janet Yellen said that if incoming data are consistent with labor market conditions strengthening and inflation making progress toward our 2 percent objective, further gradual increases in the federal funds rate are likely to be appropriate and most conducive to meeting and maintaining those objectives. Referring to the weaker than expected May employment report, Yellen noted that she sees good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones.
As a result, she expects the economic expansion to continue, with the labor market improving further and GDP growing moderately. This appears to be a solid attempt to prevent the May employment report from derailing efforts to prepare markets for a summer rate hike. With Lockhart and Bullard going a long way in talking down a June hike, but keeping open support for possibly one in July, we expect a good deal of support for normalization to resume, remembering that it is not about the incoming data itself but more how the Fed takes it into account.
Meanwhile, the benchmark Australia's S&P/ASX 200 index was trading down 0.17 percent, or 9 points, at 5,367 by 05:45 GMT.
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