Market Briefing: Two steps forward, one step back
Shaky sentiment. After a strong run equities slipped overnight. Bond yields rose & the USD clawed back ground. AUD & NZD dipped.
AU CPI. Monthly headline CPI indicator decelerated as government measures washed through. But progress on core/services inflation is more gradual.
Event radar. Several US Fed members speak tonight. US jobless claims & durable goods released. Locally, RBA's FSR & job vacancies are due.
After a strong run the positive risk sentiment that has washed through markets reversed course slightly over the past 24hrs. There has been little top-tier economic data released globally, and although geopolitical tensions in the Middle East look to be ratcheting up energy markets appear to be taking things in their stride with Brent Crude oil prices declining ~2% (now ~US$73.70/brl). European and US equities ended the day a little lower with falls of ~0.2-0.5% recorded across most of the major indices. But taking a step back shows this has just been a bump in the road with the US S&P500 (-0.2%) only recording its 3rd fall in 13 sessions. The S&P500 is still hovering near its record highs. Indeed, as our chart shows various measures of cross-asset volatility and credit spreads remain around or below their respective long-run averages, another sign the overnight gyrations were markets probably just pausing for breath.
Elsewhere, bond yields rose with the US 2yr and 10yr rates ticking up ~5-6bps. That said, at 3.56% the US 2yr yield remains close to its multi-year lows with markets continuing to factor in several interest rate cuts by the US Fed. Traders are factoring in ~40bps of rate cuts by the US Fed at the early-November meeting with ~178bps worth of easing discounted by mid-2025. In FX, the beleaguered USD clawed back ground with EUR (now ~$1.1130) and GBP (now ~$1.3320) slipping back and the interest rate sensitive USD/JPY rising ~1% (now ~144.70). USD/SGD nudged up but remains close to its decade lows (now ~1.2885). The backdrop has taken the heat out of cyclical currencies with NZD shedding ~1.2% (now ~$0.6263). The AUD also dipped as the shift in sentiment compounded the deceleration in the monthly CPI (now ~$0.6825).
Tonight, there are several members of the US Fed speaking including Chair Powell (11:20pm AEST), with US durable goods orders (a proxy for business CAPEX) and weekly initial jobless claims also due (released 10:30pm AEST). In our opinion, softer US economic data and/or comments from Fed officials outlining the prospect of a steady stream of interest rate cuts over the next year to guard against downside risks may see the USD come under renewed downward pressure.
Global event radar: US PCE Deflator (Fri), China PMIs (30th Sep), Japan Tankan (1st Oct), Eurozone CPI (1st Oct), US ISM (2nd Oct), US Jobs (4th Oct)
AUD corner
The AUD has lost a bit of ground over the past day. After touching its highest point since mid-2023, a rebound in the USD stemming from an uptick in US bond yields and shaky risk sentiment has seen the AUD shed ~1% from where it was tracking this time yesterday (now ~$0.6823) (see above). After its strong run the pullback in the AUD also coincided with it hitting ‘overbought’ levels on technical momentum indicators such as Relative Strength Indices. The AUD also weakened on some of the crosses with falls of 0.3-0.7% recorded against the EUR, GBP, CAD, and CNH over the past 24hrs.
Locally, the monthly CPI indicator for August was released yesterday. While it was largely as expected the ‘sticker shock’ of a mechanical drop in headline inflation from 3.5%pa to 2.7%pa on the back of Federal/State Government’s electricity subsidies, lower fuel prices, and base effects as last years larger price rises rolled out of calculations may have also weighed on the AUD. We had forewarned about this in yesterday’s Daily Market Briefing. That said, progress on core inflation is still slower going. The trimmed mean moderated to 3.4%pa, with sticky services prices holding up (now 4.2%pa). This is counteracting the slowdown in goods prices (now 1.4%pa) and artificial improvement stemming from government policy.
Importantly, the RBA had also assumed this was likely to occur as it noted it thought headline inflation could temporarily fall back into the target band near-term. However, core CPI is a truer gauge of inflation momentum. Central banks typically look through this type of transitory inflation impact. From our perspective the underlying inflation pulse continues to point to the RBA holding firm for some time. We believe the resilient Australian labour market, core inflation trends, fiscal/income support that is flowing into households, and lower interest rate starting point means the start of a measured and modest RBA rate cutting cycle remains a story for H1 2025. Quarterly job vacancies (a gauge of labour demand) and the RBA’s semi-annual Financial Stability Review are due today (11:30am AEST). Signs labour demand remains positive and/or assessment from the RBA that the broader household sector is coping with higher mortgage rates would support our thinking that the RBA is on a different path to its peers. As market volatility settles we feel that the ongoing adjustment in interest rate differentials in Australia’s favour should be AUD supportive not just against the USD but also against currencies like the EUR, CAD, NZD, and GBP.
AUD event radar: US PCE Deflator (Fri), China PMIs (30th Sep), Japan Tankan (1st Oct), Eurozone CPI (1st Oct), US ISM (2nd Oct), US Jobs (4th Oct)
AUD levels to watch (support / resistance): 0.6770, 0.6800 / 0.6860, 0.6900
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
THURSDAY (26th September)
AUD Job Vacancies (Aug) (11:30am)
AUD Financial Stability Review (11:30am)
USD GDP (Q2 T) (10:30pm)
USD GDP Benchmark Revisions (10:30pm)
USD Durable Goods Orders (Aug P) (10:30pm)
USD Initial Jobless Claims (10:30pm)
USD Fed’s Collins & Kugler Speak (11:10pm)
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FRIDAY (27th September)
USD Pending Home Sales (Aug) (12am)
EUR ECB’s Guindos Speaks (12:15am)
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USD Fed’s Cook Speaks (8am)
JPY Tokyo CPI Inflation (Sep) (9:30am)
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EUR ECB’s Rehn Speaks (5:15pm)
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EUR Confidence Gauges (Sep) (7pm)
EUR ECB’s Cipollone Speaks (7:40pm)
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CAD GDP – Monthly (July) (10:30pm)
USD PCE Deflator (Aug) (10:30pm)
USD Trade Balance (Aug) (10:30pm)
USD Fed’s Collins & Kugler Speak (11:30pm)
SATURDAY (28th September)
USD Fed’s Bowman Speaks (3:15am)
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