• China targets. China’s 2023 growth target was a little lower than expected. Fiscal support also looks set to be more restrained than anticipated.
• Risk sentiment. Equities rose on Friday, but the China developments, and ‘hawkish’ rhetoric from Fed Chair Powell could weigh on risk appetite this week.
• AUD pressure. RBA widely expected to hike another 25bps. But we think there is a risk its forward-looking rate guidance is adjusted.
Market attention remains on bond markets. The uptrend in global yields paused for breath on Friday, with the US 10yr falling by ~10bps to end the week back below 4%. This came through despite slightly better than expected US services ISM data, with the index remaining in ‘expansionary territory’. The US is a services-driven economy, so the positive result helped ease some growth fears, though continued strength does pose ongoing inflation challenges and points to the US Fed having to continue to tighten policy for some time yet. The combination of positive services data and lower bond yields supported equities, with the US S&P500 rising by 1.6%. The lift helped the S&P500 post its first weekly increase in a month. In FX, the moves weren’t as pronounced. The USD index eased back by less than 0.5% with EUR nudging back above 1.06 (where it was trading a day earlier) and USD/JPY drifting below 136. The AUD continues to hover around its 100-day moving average (0.6754).
News from China over the weekend is, in our view, likely to dampen the markets optimism early in the week. At the annual National People’s Congress officials announced a more modest economic growth target for 2023 (“around 5%”). As our chart shows, the target is the slowest in decades and sits slightly below current consensus expectations looking for growth of ~5.3% this year. Fiscal support also looks set to be more restrained than many were anticipating, with the fiscal deficit target (~3% of GDP) little changed. Importantly, particularly when it comes to commodities and the AUD, the quota for “special bonds” issued by local governments has also been scaled back. These bonds are mainly used to finance infrastructure spending. Reduced issuance implies relatively less commodity demand and potentially lower prices going forward.
Elsewhere, the outlook for US monetary policy will remain in the spotlight with the February employment report (Saturday morning AEDT) and Congressional Testimony by Fed Chair Powell (Wednesday and Thursday AEDT) in focus this week. Expectations are centred on another solid month of job gains, unemployment to remain historically low, and for annual wage growth to accelerate. Based on the recent run of US data, we also think Chair Powell should reiterate the “hawkish” message that the Fed still has more work to do given the inflation pulse, and that ongoing economic resilience and/or inflation surprises could be met with even more rate increases than currently projected. In our view, this mix should reinforce the markets lofty US interest rate expectations, which should continue to be USD supportive.
Global event radar: RBA Meeting (Tues), US Fed Chair Powell Speaks (Weds & Thurs), Bank of Canada Meeting (Thurs), BoJ Meeting (Fri), US Employment (Sat), US CPI Inflation (14th Mar), US Retail Sales (15th Mar), China Activity Data (15th Mar), ECB Meeting (17th Mar), BoE Meeting (23rd Mar), US FOMC Meeting (23rd Mar), Eurozone CPI Inflation (31st Mar), China PMIs (31st Mar).
AUD has eased back below its 100-day moving average (0.6754). After the recent period of consolidation, in our judgement, a look across the economic horizon points to some renewed downward pressure on the AUD building up this week.
On the external front, China’s lower 2023 growth target, and the scaling back of its local government special bond issuance, was not as ‘pro-growth’ as many where thinking it could have been (see above). In our view, this may weigh on commodities, and commodity-linked currencies like the AUD over the early part of this week. Added to that, we expect the week-ending US labour market report to continue to show that conditions remain tight, and thereby the US Fed has more work to do. Based on the combination of a resilient US economy over early-2023 and still robust inflation pulse, we anticipate Fed Chair Powell will remain ‘hawkish’ when he testifies to Congress (Wednesday and Thursday AEDT). This should reinforce the market’s US interest rate pricing, and in our opinion, support the USD.
Locally, the RBA is widely expected to raise interest rates by another 25bps (lifting the cash rate to 3.6%) at Tuesday’s meeting. However, based on the delivery of this latest hike and signs the jump up in rates is starting to have an impact across the economy (see Market Wire: Growth Momentum Slowing), we believe the RBA could mildly soften its forward-looking guidance. Last month the RBA surprised by adjusting its guidance to “further interest rate rises are expected”. We think there is a risk this could shift back to its prior rhetoric that it “expects to increase interest rates further”. A bit of word play, but in our thinking, while this keeps the door open to further rate rises this cycle, it would also give the RBA some flexibility based on how things unfold. This could also be the central message from Governor Lowe when he speaks on Wednesday. If realised, this is likely to temper the markets still bullish expectations about how high the RBA cash rate could reach this cycle. In our view, the US Fed and RBA cross-currents should keep relative interest rate differentials in the US’ favour, keeping the AUD on the backfoot.
AUD event radar: China Trade Data (Tues), RBA Meeting (Tues), RBA Governor Lowe Speaks (Weds), US Fed Chair Powell Speaks (Weds & Thurs), Bank of Canada Meeting (Thurs), BoJ Meeting (Fri), US Employment (Sat), US CPI Inflation (14th Mar), US Retail Sales (15th Mar), China Activity Data (15th Mar), ECB Meeting (17th Mar), AU Jobs Data (16th Mar), US FOMC Meeting (23rd Mar), AU Retail Sales (28th Mar), Eurozone CPI Inflation (31st Mar), China PMIs (31st Mar).
AUD levels to watch (support / resistance): 0.6610, 0.6690 / 0.6789, 0.6898
USD/SGD has continued to consolidate near 1.3450, with Friday’s pull-back in US bond yields and rise in US equities generating only modest movement in the USD (see above). We continue to think that USD/SGD should remain supported and that any near-term pullbacks should be modest. As discussed above, we think the combination of another solid US labour market report at the end of the week, and comments by US Fed Chair Powell during mid-week reaffirming that further rate hikes are needed to tame inflation should underpin the markets elevated interest rate expectations, underpinning the USD. Added to that, we also believe that the lower than predicted 2023 macro targets unveiled by China over the weekend may dampen risk appetite and/or raise some doubts about Asia’s economic growth outlook. This in turn may weigh on Asian FX. All up, we remain of the view that USD/SGD can move up towards its 100-day moving average (1.3558) over the period ahead.
SGD event radar: RBA Meeting (Tues), Fed Chair Powell Speaks (Weds & Thurs), BoJ Meeting (Fri), US Employment (Sat), US CPI Inflation (14th Mar), US Retail Sales (15th Mar), China Activity Data (15th Mar), ECB Meeting (17th Mar), Singapore CPI (23rd Mar), BoE Meeting (23rd Mar), US FOMC Meeting (23rd Mar), Eurozone CPI Inflation (31st Mar), China PMIs (31st Mar).
SGD levels to watch (support / resistance): 1.3313, 1.3377 / 1.3558, 1.3660