• Yield rebound. US yields partially recovered. But equities added to their gains & the USD consolidated. The backdrop helped the AUD hold its ground.
• Global data. US PPI inflation undershot expectations, & US retail sales weakened. By contrast, momentum in China is improving & Australian wages quickened.
• AU jobs. AU employment report today. Labour force lottery may be nosier than usual thanks to school holidays & impacts from the voice referendum.

Following yesterday’s US inflation driven drop US bond yields partially reversed course overnight. The US 2yr and 10yr rates rose 8-9bps, however it hasn’t been enough to recoup prior falls. At 4.92% the US 2yr yield is still near the lower end of its multi-month range. Notably, despite the yield rebound equities added to their gains (the S&P500 ticked up another 0.2%), industrial metal prices remained firm (copper rose 0.9%, the 3rd straight day of gains) on the back of signs activity in China is improving (see below), and the USD index consolidated. EUR drifted lower (now ~$1.0846), as did GBP (now $1.2411) with softer than anticipated UK inflation reinforcing views the Bank of England has reached its interest rate peak. The rise in US bond yields and positive risk backdrop has seen USD/JPY lift (now ~151.37), while USD/SGD has nudged back over ~1.35. The broader environment has helped the NZD and AUD hold their ground with the latter tracking above ~$0.65.

Positioning adjustments look to have played a role in the bounce in yields, especially after such a substantial move yesterday, with the US economic data generally supporting thinking that the next move by the US Fed will probably be to cut interest rates, albeit in H2 2024. Indeed, shorted-dated interest rate futures are still not factoring in any chance of another Fed rate hike this cycle. In terms of the US data Producer Price Inflation undershot predictions with the headline PPI falling in October (-0.5%mom) and the annual rate in the core PPI posting its smallest gain since early-2021. Subdued pipeline pressures point to a further moderation in CPI inflation down the track. US retail sales also weakened. A slump in auto sales weighed on headline sales (-0.1%, the first monthly decline since March), while the control group (which feeds into US GDP) stepped down with only modest 0.2% growth recorded.

As shown, the surge in prices due to the global supply-chain disruptions and reallocated spending towards ‘goods’ during COVID was a key contributor to the very strong growth in nominal US retail sales over the past few years. However, the price-effect has now largely faded, and at the same time volumes are starting to moderate as the mix of dwindling ‘excess savings’, tighter credit conditions, the resumption of student loan repayments, and below average consumer confidence are starting to restrain spending. We think these forces should continue to gather pace, and given household consumption is the engine room of the US economy (it is ~3/4’s of US GDP) a slowdown in overall activity looks set to occur. The US’ relative economic outperformance was a factor behind the USD strength over recent months. Signs US growth is coming back to the pack, coupled with expectations the US Fed has reached the end of its tightening phase should, in our opinion, see the USD continue to gradually deflate over the period ahead.

AUD corner

The AUD has held onto the bulk of its post US inflation data gains with the positive risk environment and local and China data helping it stay above ~$0.65. The AUD also clawed back ground against the EUR (+0.3%, now ~0.60) and GBP (+0.7%, now ~0.5244) with a downside surprise in UK inflation reinforcing thoughts the Bank of England won’t raise interest rates again. The upbeat risk sentiment also helped AUD/JPY power ahead with the pair (now ~95.512) a whisker away from its September 2022 peak.

In China, the October data was generally better than predicted. Industrial production quickened (+4.6%pa) and retail sales accelerated more than forecast (+7.6%pa). Fixed asset investment was a touch underwhelming, but in the main, the improving pulse supports our thinking that the cyclical bottom is behind us. As stimulus measures gain traction, and with authorities set to add more to reinforce the recovery and ward off the deflation threat, we think growth could pick up further. In our judgement, a sturdier Chinese economy should be supportive for regional growth, commodity demand, and the AUD over time.

Locally, robust wages raises the risk core inflation takes longer to come back down to the RBA’s 2-3% target. The wage price index recorded its strongest quarterly growth in the series history in Q3 (+1.3%qoq) as the jump in minimum and award wages, removal of caps across the public sector, and general labour market tightness flow through. Annual growth is running at 4%pa, a bit above where the RBA had penciled it to be. Given the prevalence of multi-year enterprise bargaining agreements in Australia, wage pressures might linger well into 2024. Hence, while the reluctant RBA may not hike rates again, we think the inflation environment, support to aggregate demand from the population surge, and income tax cuts coming in in mid-2024 could mean it lags the next global rate cutting cycle. Over time we believe the contrasting policy trends between the RBA and others should see yield spreads, which have been a drag on the AUD over recent years, become more AUD supportive.

While the medium-term outlook for the AUD looks to be brightening given our thoughts the USD should continue to lose ground and with momentum in China picking up, over the near-term the AUD will need to contend with the latest Australian jobs report (11:30am AEDT). The monthly labour force lottery may be nosier than usual thanks to the timing of school holidays and impacts from the voice referendum. And this might generate a bout of intra-day AUD volatility. Consensus expectations are centered on job gains of ~24,000 in October, with unemployment ticking up to 3.7%. A softer print could see some of the heat come out of the AUD, while a stronger result is likely to see markets add to RBA rate hike pricing, giving the AUD a further helping hand.

AUD levels to watch (support / resistance): 0.6420, 0.6480 / 0.6540, 0.6580