• Holding on. Modest financial market moves. US equities & oil tick up. NZD a bit softer. AUD edges up slightly & outperforms on the crosses.
• Data flow. More signs US jobs market is holding up. EZ inflation quickens, raising odds of an ECB rate hike next week. AU Q1 GDP released today.
Global Trends
A fairly quiet 24hrs across markets with modest net moves coming through across most asset classes. US equities nudged up (S&P500 +0.1%), US bond yields consolidated, oil rose slightly (WTI crude +1.4%), and the major currencies tread water with EUR drifting sideways (now ~$1.1630), USD/JPY ticking up (now ~159.90), the NZD easing (now ~$0.5926), and the AUD a bit firmer (now ~$0.7180).
There was the usual batch of US/Iran related headlines with President Trump reiterating his optimistic comments that he thinks an interim peace deal can be reached “soon”. This is something that has been repeated regularly since the original “two-week” ceasefire was agreed in early April. As outlined before, the conflict may only be ‘phase 1’ with the effect on supply chains and energy from the prolonged closure of the Strait of Hormuz set to cast a long shadow on the world economy. Shipping via the Strait of Hormuz and production of various commodities/products may take months/quarters to get back online.
The impacts on global inflation continue to bubble to the surface. The May reading of Eurozone CPI confirmed an acceleration in headline and core inflation with the latter quickening to 2.5%pa, its fastest pace since April 2025. Expectations the European Central Bank will raise interest rates sooner rather than later have grown with a hike at next week’s meeting now fully priced in and ~65bps of tightening discounted by year-end. In the US, JOLTS job openings (a gauge of labour demand) increased more than anticipated, and the rate of “layoffs” declined, more signs the jobs market is holding up better than feared. Cleveland Fed President Hammack, one of the three FOMC members who voted in favour of dropping the “easing bias” at the last meeting, reiterated her “hawkish” views by noting policymakers might need to act soon to address inflation. Markets are pricing in a US Fed rate increase by March 2027, a long way from the multiple rate cuts anticipated before the US/Iran conflict kicked off.
The US services ISM is out tonight (12am AEST) with the monthly US jobs report the focal point at the end of the week (Fri night AEST). In our view, the pickup in momentum across the US economy over early 2026 could see the US jobs report exceed downbeat consensus forecasts. If realised, we think this may bolster the view the US Fed could raise interest rates down the track, which in turn might see the USD strengthen.
Trans-Tasman Zone
Markets have been quiet and contained over the past 24hrs, although in contrast to the slight dip in the NZD (now ~$0.5926) the AUD perked up a little (now ~$0.7180). The AUD also relatively outperformed on the major cross-rates with gains of ~0.2-0.4% recorded against EUR, JPY, GBP, NZD, CAD, and CNH.
In terms of the domestic economic news flow, external RBA board member Harper gave his first public address and he emphasized policymakers are watching for a shift in long-term inflation expectations. Inflation expectations can lead actual inflation as they can influence price/wage setting behaviour. According to Harper if they become unanchored “strong action” could be required. With this in mind, there has also been attention on the latest Fair Work Commission decision where a 4.75% increase to the minimum wage award was unveiled. This is the upper end of expectations with ~21% of the workforce paid at the applicable minimum wage/awards directly affected. There is some risk this flows through to inflation given it is a step up from last years wage hike. However, an offset is the weaker economic outlook which we feel could constrain the bargaining power of many workers.
Today, Q1 Australian GDP is released (11:30am AEST). Softness in a few partial indicators suggest growth in the March quarter was more sluggish than previously thought. Analysts’ forecasts have been pared back with ~0.3-0.4%qoq growth now anticipated. The path forwards looks even more challenging with the jump in interest rates and fuel costs set to weigh on activity across sectors such as housing, construction, logistics, and consumption. Because of lingering medium-term inflation risks and elevated inflation expectations another RBA rate hike over the next few months still appears more likely than not, in our opinion, but this is largely factored in (another RBA rate hike is fully discounted by next February). This would also generate even more headwinds for the economy.
We continue to believe it will be difficult for the RBA to be more ‘hawkish’ than what is priced in. By contrast, expectations other central banks could be raising rates the next few months continue to build. This makes us think relative yield differentials might have peaked and may start to turn against the AUD. This, coupled with the slowdown in Australian economic growth, challenges faced by the global/Asian economy from the Middle East conflict, and lingering overvaluation (the AUD is still ~2% above our ‘fair value’ estimate) suggest there are more downside than upside risks over coming weeks/months.
