Market Briefing: US CPI boosts sentiment
Read the 2025 Currency Outlook from Corpay Currency Research
Inflation trends. Softer US & UK core CPI weighed on bond yields & supported risk sentiment overnight. The backdrop helped AUD & NZD edge higher.
AU jobs. Monthly labour force data due today. There is a risk of payback after a strong report last month. Softer figures could bolster RBA rate cut bets.
Data & politics. US retail sales out tonight. China data batch released tomorrow. Next week focus will be on the US Presidential Inauguration.
Global Trends
US and UK inflation was in focus overnight and downside surprises generated a ‘relief rally’ in some of the recently beaten-up markets. In terms of the numbers, UK headline and core CPI decelerated more than expected with the latter slowing to 3.2%pa, matching its slowest run-rate since late-2021. The step down in UK inflation bolstered views the Bank of England could deliver another interest rate cut in February with markets now assigning it a ~90% probability. In the US, while headline inflation ticked up as anticipated (now 2.9%pa), the core measure which excludes food and energy edged slightly lower (now 3.2%pa). Moreover, the services CPI ex housing and energy series, a gauge Fed Chair Powell has mentioned is on his radar, rose just 0.2%, the softest monthly print since July. Markets are still not looking for another US Fed rate cut until mid-2025, though the disinflation trend has seen a little more potential easing factored in after that with a second rate reduction in H2 viewed as a 50/50 bet.
Bond yields, which have risen sharply over the past few weeks, fell back in reaction to the inflation prints. UK yields declined ~13-16bps across the curve, while in the US yields declined ~10-15bps. The benchmark US 10yr rate endured its largest one-day drop since August, but the moves only put it back where it was tracking a week ago (now ~4.65%) with yields still up towards the upper end of their cyclical range. The adjustment in interest rates flowed through and generated a positive jolt for equities. The US S&P500 increased 1.8% with the tech-focused NASDAQ outperforming (+2.5%, its best one-day performance since early-November).
By contrast, the reaction in FX was more mixed and muted. The initial knee-jerk dip in the USD index unwound with EUR falling back sub ~$1.03 and GBP slipping to ~$1.2235. The interest rate sensitive USD/JPY shed ~0.9% (now ~156.51), tracking the narrowing in interest rate differentials stemming from falls in US yields and reinvigorated expectations the Bank of Japan may deliver another rate hike next week after Governor Ueda mentioned it would be up for discussion. Elsewhere, the more positive risk vibes helped NZD (now ~$0.5619) and AUD (now ~$0.6230) claw back some lost ground.
The US Presidential Inauguration (Tues morning AEDT) is fast approaching, and President Trump has repeatedly stressed he will hit the ground running and will look to implement a range of measures, especially tariffs, on day one. If he were to follow through another bout of market turbulence could eventuate. Ahead of that the US data will remain in focus with retail sales out tonight (12:30am AEDT). In our opinion, signs US consumer spending (the engine room of the economy) is holding up might trigger a bit of a reversal in interest rate expectations which in turn could be USD supportive.
Global event radar: US Retail Sales (Tonight), China Data (Fri), 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
The more positive tone in markets generated by softer than predicted core inflation data in the US (and UK) overnight has given the NZD (now ~$0.5619) and AUD (now ~$0.6230) a bit of a boost over the past 24hrs. That said, despite the recent uptick the AUD remains down near multi-year lows (the AUD has only traded sub ~$0.62 ~1% of the time since 2015), with the NZD still lingering around levels last traded in Q4 2022. The upbeat market backdrop also helped the AUD generally outperform with gains of 0.3-0.7% recorded against EUR, GBP, NZD, CAD, and CNH. AUD/JPY (-0.3%, now ~97.47) has been an exception with the JPY supported by the downshift in global bond yields and expectations the Bank of Japan may deliver another interest rate hike at next week’s meeting.
Today, local focus will be on the December labour force report (11:30am AEDT). Labour market developments are a key input into the RBA's policy deliberations, and we think there are risks the data undershoots consensus forecasts. Jobs growth in November was stronger than anticipated because a larger than normal share of people started jobs that they had already signed up to with the October school holidays likely to have delayed start dates. We think there might be some payback in December. Also note that as our chart shows employment has declined in December in 2022 and 2023 due to new seasonal trends that have emerged over recent years. In our judgement, a soft Australian jobs report, especially an uptick in unemployment, may bolster the markets RBA rate cut bets which were kicked into gear recently by the slowdown in core inflation in the monthly CPI data. The more detailed quarterly CPI report is due on 29 January.
A 25bp RBA rate cut on 18 February is now ~73% factored in, with a full 25bp reduction discounted by April and nearly 3 moves priced in by year-end. A further adjustment in RBA rate cut pricing towards an adjustment in February could see the AUD partially unwind some of its recent rebound, in our view.
AUD event radar: AU Jobs (Today), US Retail Sales (Tonight), China Data (Fri), 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
THURSDAY (16th January) AUD Jobs Report (Dec) (11:30am) GBP GDP – Monthly (Nov) (6pm) EUR ECB Meeting Accounts (11:30pm)
FRIDAY (17th January) USD Philly Fed Survey (Jan) (12:30am) USD Retail Sales (Dec) (12:30am) USD Jobless Claims (12:30am) USD NAHB Housing Index (Jan) (2am) EUR ECB’s Panetta Speaks (7am) 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
About the author
