Market Briefing: Swings & roundabouts
Vol. continues. Intra-session market swings. US/European equities ended the day lower. AUD & NZD nudged up. US data & election on the horizon.
Rates repricing. Positive EZ GDP & higher regional inflation saw ECB rate cut bets pared back. US GDP also solid. Bond yields rose, with EUR ticking up.
AU CPI. Headline inflation back in RBA's band. This is because of government measures. Core CPI still above. RBA expected to hold next week.
Intra-session volatility continued across markets yesterday as participants reacted to the incoming macro news flow. European and US equities ended the session lower (EuroStoxx50 -1.3%, S&P500 -0.3%), while bond yields rose, particularly at the policy expectations driven front-end of the curve. The German 2yr rate jumped up ~12bps (now ~2.25%) with the US equivalent ~8bps higher (now ~4.17%). UK yields also increased (10yr +3bps) after Chancellor Reeves laid out plans for greater fiscal spending in the latest budget which in turn runs the risk of prolonging the Bank of England’s battle against inflation.
A re-acceleration in Eurozone GDP growth in Q3 (from 0.2%qoq to 0.4%qoq), coupled with upside surprises in CPI inflation out of Spain and Germany saw markets pare back ECB rate cut bets. A series of rate reductions are still looked for, however odds of an outsized 50bp cut in December have declined. Similarly, in the US the economic data was generally better than predicted. Monthly ADP employment was stronger than forecast (+233,000, the best result since mid-2023), and Q3 GDP confirmed growth was solid with activity running at an above potential 2.8% annualised pace. Another 25bp rate cut by the US Fed at next week’s meeting is still assigned a ~94% chance, but beyond that a gradual easing cycle is penciled in. ~107bps of rate cuts by the US Fed are now discounted by July 2025, down from ~170bps at the start of the month.
In FX, the crosscurrents saw the USD index drift a touch lower with a firmer EUR (now ~$1.0860) more than offsetting the consolidation in USD/JPY (now ~153.35) and weaker GBP (now ~$1.2963). Closer to home, NZD nudged up (now ~$0.5975), though it remains near the bottom end of its multi-month range. After its negative run the AUD also clawed back a bit of ground (now ~$0.6573) with the stickiness in Australian Q3 core inflation reinforcing the idea RBA rate cuts are still months away.
Today there are a few events on the radar. The Bank of Japan (no set time) is widely seen as keeping policy steady. Data-wise, the China PMIs (12:30pm AEDT), Eurozone CPI (9pm AEDT), the US PCE deflator (the Fed’s preferred inflation gauge) and employment cost index (a broad wages indicator) (both 11:30pm AEDT) are due. While some softening in US core inflation and/or wages may see the USD ease, we don’t believe moves should be overly pronounced with the US election just around the corner (5 November). Punters view a Trump victory and a Republican sweep of Congress as the most likely outcome. If Trump is victorious we think more USD strength is probable as markets further re-price the outlook due to his platform of trade tariffs, greater fiscal spending, and moves to curb US immigration. For more see Market Musings: US election - FX inflection point.
Global event radar: BoJ Meeting (Today), China PMIs (Today), EZ CPI (Tonight), US PCE Deflator (Tonight), US Jobs (Fri), RBA Meeting (5th Nov), US Election (5th Nov), BoE Meeting (7th Nov), US Fed Meeting (8th Nov)
AUD corner
The beleaguered AUD has found some support with the slightly softer USD and reaction to the Australian core inflation data giving it a bit of a helping hand over the past 24hrs. Nevertheless, at ~$0.6573 the AUD is still down near levels last traded in mid-August and below its 1-year average. Outside of AUD/EUR (now ~0.6055), which slipped a little more on the back of the upward repricing in Eurozone interest rate expectations (see above), the AUD has also generally edged up a touch on most of the other major crosses. Gains of ~0.1-0.6% were recorded versus the JPY, GBP, NZD, and CAD.
Locally, Q3 inflation was released yesterday. Headline inflation decelerated to 2.8%pa, putting it back in the RBA’s target band for the first time in a few years. However, this was a function of government subsidies and petrol price base effects. Core inflation ticked down modestly (from 3.9%pa to 3.5%pa), with stickiness in services inflation still on show. As our chart illustrates, services prices are still running north of their pre-COVID average. This reflects the elevated level of activity across this part of the economy (due to the population surge), as well as other drivers such as rents and low unemployment (wages are a major cost for services firms). We don’t expect the drop in headline inflation to trigger a response by the RBA at next Tuesday’s meeting. It shouldn’t be swayed by artificial measures as it is focused on inflation persistence which is better gauged by core trends. It needs to be remembered that as government subsidies end, headline inflation is likely to jump up and converge towards core CPI.
All up, the underlying impulses and resilient labour market still makes us think that the start of a modest RBA rate cutting cycle is a story for H1 2025. Signs consumer spending is holding up in today’s retail sales data (11:30am AEDT) may reinforce this assumption. Over the medium-term we believe the diverging trends between the RBA and others should be a relative AUD support, especially versus the EUR, CAD, GBP, and NZD. However, against the USD we think near-term headwinds remain in place. The US PCE deflator and employment cost index are due tonight (both 11:30pm AEDT) with non-farm payrolls released on Friday night. While a step down in non-farm payrolls is anticipated (mkt 110,000 from 254,000) a lot of that stems from negative one-off impacts from Hurricane Milton and strikes at a few large corporates. Signs broader US labor conditions are still solid might underpin the USD, particularly with the US election coming up (5 November). As mentioned before, markets have been adjusting to the prospect of a Trump win, but we don’t feel it has been fully factored in. There could be further to go, which if realised may exert more downward pressure on the AUD. For more see Market Musings: US election - FX inflection point.
AUD event radar: BoJ Meeting (Today), China PMIs (Today), EZ CPI (Tonight), US PCE Deflator (Tonight), US Jobs (Fri), RBA Meeting (5th Nov), US Election (5th Nov), NZ Jobs (6th Nov), BoE Meeting (7th Nov), US Fed Meeting (8th Nov)
AUD levels to watch (support / resistance): 0.6500, 0.6550 / 0.6610, 0.6650
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
THURSDAY (31st October)
JPY BoJ Decision (no set time)
NZD Business Confidence (Oct) (11am)
AUD Building Approvals (Sep) (11:30am)
AUD Retail Sales (Sep) (11:30am)
AUD Retail Sales Volumes (Q3) (11:30am)
CNY PMIs (Oct) (12:30pm)
GBP BoE’s Breeden Speaks (12:35pm)
EUR France CPI Inflation (Oct) (6:45pm)
EUR ECB’s Panetta Speaks (8pm)
EUR CPI Inflation (Oct P) (9pm)
CAD GDP – Monthly (Aug) (11:30pm)
USD Employment Cost Index (Q3) (11:30pm)
USD PCE Deflator (Sep) (11:30pm)
USD Initial Jobless Claims (11:30pm)
FRIDAY (1st November)
USD Chicago PMI (Oct) (12:45am)
AUD New Home Lending (Sep) (11:30am)
CNY Caixin PMI – Manufacturing (Oct) (12:45pm)
USD Jobs Report (Oct) (11:30pm)
SATURDAY (2nd November)
USD ISM Manufacturing (Oct) (1am)
*Note, all times/dates provided are AEDT
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