Market Briefing: Holding on
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Mixed signals. US equities failed to push on despite further falls in bond yields. USD/JPY continues to slip back. AUD & NZD lose a bit of ground.
Data & comments. US consumer spending holding up. Fed's Waller encouraged by inflation trends keeps the door open to more policy easing.
AU jobs. Another robust Australian labour force report. Unemployment better than RBA expecting. China data batch, which includes Q4 GDP, out today.
Global Trends
A mixed performance across markets overnight with the data flow and comments by US officials in focus. After yesterday’s strong rally US equities consolidated despite a further pull-back in bond yields with some weakness across the megacap tech stocks dragging on the NASDAQ (-0.6%). US rates slipped back another ~3-5bps across the curve with the benchmark 10yr yield now hovering near ~4.60%. While this is ~20bps below recent highs, in an illustration of just how large the upswing over the past few months has been, the US 10yr is still tracking towards the upper end of its multi-year range. In FX, the USD index is slightly lower than where it was this time yesterday with the rebound in the JPY in the drivers seat. In line with the drop in global bond yields and expectations the Bank of Japan could deliver another rate hike next week USD/JPY has falling to ~155.25, a multi-week low. Elsewhere, EUR (now ~$1.03) and GBP (now ~$1.2230) have tread water with NZD (now ~$0.5609) and AUD (now ~$0.6213) a bit softer over the past 24hrs.
Data wise, US retail sales for December, particularly the ‘control group’ figures which exclude volatile categories like autos, gasoline, and building materials, and that flow directly into GDP, showed consumer spending is holding up. The 0.7% gain in the ‘control group’ was the strongest in 3-months. And although weekly initial jobless claims (a timely read on how many people are applying for unemployment benefits) ticked up they remain at low levels. At the same time, the Philly Fed business survey surged to one of its highest readings in ~40-years, though this may reflect some front-running of activity ahead of tariffs being imposed on imports.
In terms of policymakers, Trump’s pick for Treasury Secretary, Scott Bessent, soothed some market fears. He noted that: maintaining the USD as the worlds reserve currency was critical; he supports the US Fed’s independence; the US won’t default on its debt under his watch, and; it is important the 2017 income tax cuts are extended. On top of that Fed Governor Waller, an influential policymaker, flagged that if inflation trends remain favourable the US Fed could lower interest rates again in coming months and that based on where ‘neutral’ is estimated to be ~3-4 cuts this year are possible. This is something markets aren’t anticipating anymore with less than 2 Fed rate reductions discounted over 2025 and none before mid-year priced in.
Today, attention will be on the China data batch which includes Q4 GDP (1pm AEDT). Consensus is looking for annual growth to nudge up to 4.9%pa, broadly inline with the government’s 5% annual target. Signs momentum is improving might support sentiment near-term. But with the US Presidential Inauguration (Tues morning AEDT) approaching, and President Trump stressing he will hit the ground running, especially around tariffs, there is the potential for renewed bouts of USD supportive volatility on the horizon.
Global event radar: China Data (Today), BoJ Meeting (24th Jan), Global PMIs (24th/25th Jan), China PMIs (27th Jan), BoC Meeting (30th Jan), US Fed Meeting (30th Jan), EZ GDP (30th Jan), ECB Meeting (31st Jan), US GDP (31st Jan)
Trans-Tasman Zone
AUD (now ~$0.6213) and NZD (now ~$0.5609) have slipped back slightly over the past 24hrs, despite the uptick in industrial metals prices, gains in Asian and European equities, and another robust Australian jobs report. Indeed, outside of a modest lift against the CAD (+0.2%) the AUD eased by ~0.2-0.3% versus the EUR, GBP, and CNH, with AUD/JPY declining ~1% (now ~96.46) as expectations the BoJ could raise rates again next week compounded the fall in global bond yields. AUD/JPY is now ~2.8% from its early-January highs and is back down near the bottom of its ~1-month range.
Data wise, the volatile monthly labour force survey once again defied expectations with Australian employment rising by ~56,300 in December. Although it was driven by part-time workers this still helped push the employment-to-population ratio to record highs. Notably, unemployment remains historical low (now ~4%) and is in a better position than what the RBA was penciling in (in November the RBA projected unemployment to rise to 4.3% by year-end). In our opinion, the resilience in the labour market should cool some jets about a February start to the RBA’s rate cutting cycle, though the Q4 CPI (due 29 January), along with new staff forecasts about the outlook, will be important inputs into the Board’s decision. Markets are pricing in a ~67% chance of a 25bp RBA rate cut on 18 February with ~70bps of easing discounted by year-end.
We think a paring back of some of the near-term RBA rate cut pricing and/or signs of improved growth momentum in China (Q4 GDP is out today at 1pm AEDT) may give the beleaguered AUD a little short-term support (especially on the crosses). However, the bigger picture story of the US’ relative economic strength (which was on show again overnight via the solid retail sales figures) and prospect of trade tariffs being formally unveiled as soon as next Tuesday after President Trump is inaugurated look to be underlying supports for the USD that also create a ceiling for AUD/USD.
In terms of the NZD we think downside risks remain. In addition to the USD trends mentioned next week Q4 NZ CPI is released (Wednesday). Various leading indicators point to a further moderation in NZ inflation pressures. If realised, this coupled with the weakness in NZ economic activity and widening cracks in the NZ labour market could reinforce the case for the RBNZ to deliver another 50bp rate cut when it meets on 19 February. The downshift in NZ interest rates over 2025 should be a lingering NZD headwind, in our view.
AUD event radar: China Data (Today), NZ CPI (22nd Jan), BoJ Meeting (24th Jan), Global PMIs (24th/25th Jan), China PMIs (27th Jan), NZ CPI (29th Jan), BoC Meeting (30th Jan), US Fed Meeting (30th Jan), EZ GDP (30th Jan), ECB Meeting (31st Jan), US GDP (31st Jan)
AUD levels to watch (support / resistance): 0.6130, 0.6160 / 0.6250, 0.6290
NZD levels to watch (support / resistance): 0.5510, 0.5580 / 0.5650, 0.5680
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
FRIDAY (17th January) CNY GDP (Q4) (1pm) CNY Monthly Activity Data (Dec) (1pm) GBP Retail Sales (Dec) (6pm) EUR ECB’s Nagel Speaks (9pm)
SATURDAY (18th January) USD Housing Starts/Building Permits (Dec) (12:30am) USD Industrial Production (Dec) (1:15am)
*Note, all times/dates provided are AEDT
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