Weekly Market Update: Weak US Jobs Data Shifts Interest Rate Outlook (06 July 2026)

“If two wrongs don’t make a right, try three”

- Laurence J. Peter

Cartoon of the Week

Source:  www.heraldsun.com.au

Funds Snapshot

Movers & Shakers (week ending 3rd July):

Stocks (ASX 200 ↑0.24%, S&P 500 ↑0.58%, NASDAQ ↑0.05%)

Bond Yields (ACGB3Y 4.41%, ↑ 5 bps / ACGB10Y 4.80%, ↑ 8 bps)

Bond Curves (A$ 3s10s +39 bps, ↑3 bps)

Credit Spreads (Major Bank 5Y Senior +64 bps, ↔ / Tier 2 +124 bps, ↔))

Oil (Brent US$71.66/bbl, ↓2.04%)

Gold (US$4,196/oz, ↑4.49%)

Labour Market Fault Lines: A Weak US Jobs Report Reframes the Rate Outlook

Executive Summary

• Last week produced a set of Australian data releases that, taken together, present a genuinely mixed picture of the domestic economy. The most significant surprise was May's trade balance swinging to a deficit of $3.0bn — against a survey expectation of a $2.2bn surplus — driven by a 6.9% fall in exports and a 2.6% rise in imports.

• This is a material deterioration in Australia's external accounts and warrants careful attention. Against that, private sector credit growth accelerated to 8.2% year-on-year, PMI readings moved back into expansion territory, and the RBA released minutes from its June meeting that will inform the Board's thinking on rates.

• Internationally, the US June payrolls print — at 57K, roughly half the consensus forecast — was the dominant global event, raising the probability of Federal Reserve rate cuts later in 2026. This has meaningful implications for the RBA's own path, for Australian bond markets, and for the Australian dollar. For income-focused investors in Australian fixed income and credit, the environment remains attractive, but the policy signposts are beginning to shift.  A quiet week ahead for local macro data.

Market Overview

• Three domestic data points last week deserve some attention from Australian investors. The first is the trade balance, which surprised dramatically to the downside. The second is private sector credit growth, which surprised to the upside. The third is the PMI data, which confirms that activity — while not strong — has returned to expansion. These three pieces of data are not pulling in the same direction, and understanding the tensions between them is the key to reading the current Australian economic landscape.

• The trade deficit is the most jarring development. Australia has run consistent trade surpluses for much of the past decade, underpinned by strong commodity export revenues — particularly iron ore, LNG, and coal. A swing to a $3.0bn deficit, against a survey of a $2.2bn surplus, represents a $5.2bn miss relative to expectations. The primary driver was a 6.9% fall in exports — almost certainly reflecting the combination of lower commodity prices (Brent crude fell 21% in June, and other key export commodity prices have also softened) and weakening demand from China. This matters because Australia's terms of trade — the ratio of export prices to import prices — is a key determinant of national income, government revenues, and the Australian dollar's fair value.

• The import rise of 2.6% adds another layer of complexity. Rising imports in a slowing economy can signal two things: either businesses and consumers are still spending (a positive sign for demand), or imports are taking market share that would otherwise support local production. Combined with the export fall, the net result is a deterioration in the current account that, if sustained, would begin to weigh on the AUD and Australia's external position.

• Set against this, private sector credit growing at +8.2% YoY — and +0.7% MoM, slightly above the +0.6% survey — is a genuinely resilient number for a high-interest rate environment.  Businesses and households are continuing to borrow, which speaks to underlying confidence and economic momentum. It also tells the RBA that financial conditions, while tighter than a few years ago, have not yet materially constrained credit activity. This is a two-edged observation: it is a sign of economic health, but it also reduces the urgency for rate cuts.

• The RBA released the minutes of its June policy meeting this week, with the underlying tone being a little more hawkish than perhaps pundits were expecting with the board agreeing that policy must remain restrictive as the economy continues to run with excess demand and inflation remains "materially" above target.  Potential rate hikes remain in the table, although market pricing is less convinced (only 10 – 15 bps of hikes priced in).  The board highlighted that labour and non-labour cost pressures remain widespread, and weak productivity growth continues to threaten the economy's supply capacity.

Equity Markets

PMIs recover, but trade data clouds the export sector outlook

• The return of Australia's composite PMI to expansion territory — final reading of 50.4 in June, up from the preliminary 49.8 — is a meaningful improvement and suggests that the worst of the domestic activity slowdown seen in mid-2026 may have passed.  Services PMI at 50.5 and manufacturing at 51.5 both confirm that the expansion is reasonably broad-based, rather than concentrated in one sector. For equity investors, a PMI above 50 is typically associated with positive earnings momentum, particularly for domestically exposed businesses.

• However, the trade data introduces a clear negative for resource and export-linked equities. A 6.9% fall in exports in a single month is a significant move, and for ASX-listed companies whose revenues are denominated in export commodity prices — major miners, LNG producers, and agricultural exporters — the combination of lower prices and weaker volumes is a meaningful headwind to earnings expectations. This is particularly relevant given that resource stocks represent a substantial portion of the ASX 200 by market capitalisation.

• Building approvals falling 1.1% in May — against a survey of flat — continues a pattern of weakness in the residential construction pipeline.  While private sector house approvals posted a solid 2.8% rise (partially recovering the prior month's 1.0% decline), the broader approvals data suggests the construction industry is not yet a source of positive economic momentum.  For equities exposed to housing construction — building materials, diversified industrials, and REITs with development pipelines — the data remains cautious.

• The interaction between the weak US payrolls data and Australian equities runs through two channels. First, a US labour market that is softening reduces the probability of further Fed tightening, which is generally positive for global risk appetite and supports equity valuations. Second, a weakening US economy, if it deepens, could reduce demand for Australian goods and services — the same mechanism now visible in the trade data.  Equity investors should be alert to both sides of this dynamic.

• On valuations, the ASX 200 remains reasonably well-supported relative to international markets, given its relatively higher weighting in financials and resources, and the absence of an expensive technology sector comparable to the US.  However, if the trade deficit signals a structural shift in the terms of trade — rather than a one-month aberration — some downward revision to earnings expectations for the resource sector would be warranted.

Fixed Income & Credit

Australian bonds, credit resilience, and the rate cut question

• Australian 3-year ACGB yields rose 5 bps last week to 4.41%, while 10-year yields increased to 4.80% (+8bps WoW).  BBSW held at 4.46%.  The US payrolls miss last week adds further weight to the case that the global rate cutting cycle — when it arrives — may come sooner than previously assumed. The RBA's own path will be shaped primarily by domestic inflation data, but global forces are beginning to lean in the same direction.

• For Australian fixed income investors, the RBA meeting minute deserved a cursory perusal, nothing to significant for market to digest.  PMI data also not really market moving.  Instead, it is the interaction between the weak US payrolls print and what it implies for the global rate environment that probably occupied traders and investors minds.  When the world's most influential central bank is pushed toward easing by a deteriorating labour market, the knock-on effects for Australian rates can’t be ignored.  Australian bond markets, which had already rallied modestly in June on the back of the domestic CPI undershoot, will have continued to find support as global rate cut expectations repriced.

• The credit side of the ledger remains encouraging. Private sector credit growing at +8.2% YoY confirms that Australian banks' lending books continue to expand at a healthy pace, which is supportive of bank credit quality and, by extension, of Australian bank floating rate notes and senior unsecured paper. The Australian financial sector's credit fundamentals — capital adequacy, asset quality, and funding diversity — remain strong by both domestic historical standards and international comparison.

• For floating rate note investors specifically, the key question raised by this week is whether the income environment is beginning to turn.  BBSW at 4.46% has been a stable and attractive base rate for floating rate credit portfolios throughout the period of RBA tightening.  While the US might be closer to easing than hiking, local markets are pricing an unchanged RBA cash rate until the back half of 2027 at a minimum.

• In the RMBS and securitised credit market, the domestic backdrop remains fundamentally sound. Australian unemployment at 4.4% in May, private credit growing healthily, and PMIs back in expansion all point to a borrower population that, in aggregate, is managing its debt obligations. The trade deficit is a new and notable risk to monitor — if export income falls and unemployment begins to rise, the stress indicators in mortgage portfolios will bear close watching. For now, however, the picture is stable.  Senior RMBS tranches, backed by high-quality residential mortgage collateral and structural protections, continue to offer attractive risk-adjusted income at current spread levels.

• Building approvals weakness is also relevant for the mortgage and RMBS market over a longer horizon. Fewer new dwellings being approved means tighter housing supply relative to demand, which typically supports residential property prices and, therefore, the collateral underpinning mortgage portfolios. From a credit perspective, this is a modest positive for existing RMBS and residential mortgage-backed structures.

RBA Watch

• The case for the RBA holding rates steady remains strong. Trimmed mean CPI at +3.6% YoY is above the top of the 2% – 3% target band.  Private sector credit at +8.2% YoY shows no sign of credit constraint – although with the proposed changes to Capital Gains Tax and Negative Gearing, we expect to see some slow down.  Employment remains stable at 4.4% unemployment rate.  Household spending data from May surprised to the upside at +5.5% YoY. Taken together, these readings suggest an economy with enough residual momentum to keep inflation above target without additional rate increases but not obviously requiring rate cuts either.

• The case for eventual easing is building, however.  The global environment is shifting — a softening US labour market, declining commodity prices, a 21% fall in Brent crude during June, and China's uneven demand outlook all point toward a less inflationary global backdrop over the next 6–12 months. Domestically, GDP growth at +0.3% in the March quarter is below trend, and the trade deficit — if sustained — would reduce national income and export revenues. The PMI returning to 50.4 is encouraging, but hardly robust.

• Our assessment is that the RBA is likely to remain on hold through the balance of 2026, with the first cut becoming possible (bit not yet probable) in early 2027 if the domestic inflation data continues to moderate and the global growth picture softens further. A single month's trade data or a single US payrolls release does not change policy — but the accumulation of evidence is shifting in a direction that the RBA will need to acknowledge in its communications.