• Range trading. US equities rebound, while bond yields & the USD tread water. Upside surprise in Canadian inflation generated limited CAD impact.
• AU CPI. May reading of the monthly CPI due today. Data will include more services prices. Consensus looking for annual inflation to re-accelerate.
• US events. No major US data or speeches tonight. Durable goods (Thurs night AEST) & PCE deflator (Fri night AEST) the next key US releases.
In the main global markets continue to range trade with Northern Hemisphere summer trading conditions kicking into gear. Unlike the modest falls across European equities (EuroStoxx50 -0.3%), US equities rose (S&P500 -0.4%, NASDAQ +1.3%) with a rebound in tech heavyweight NVIDIA leading the way. Across bonds, yields generally consolidated with the German (now ~2.41%) and US (now ~4.25%) 10yrs treading water. The members of the US Fed that spoke counteracted each other. The normally ‘hawkish’ Fed Governor Bowman warned about upside inflation risks and noted she wasn’t in favour of rate cuts this year. Yet the typically ‘dovish’ Fed Governor Cook outlined it would be appropriate to reduce rates “at some point” given she sees inflation improving gradually near-term before more rapid progress comes through in 2025.
By contrast, bond yields in Canada increased ~5-7bps across the curve after a slightly higher than predicted May CPI print saw traders pare back some of their expectations for a quickfire follow up rate cut by the Bank of Canada after it started its easing cycle in June. While headline and core inflation are still in the BoC’s 1-3% target range, the uptick highlights the bumpy path ahead BoC Governor Macklem flagged. That said, the FX reaction was muted with USD/CAD hovering around ~1.3650, inline with the limited moves in the broader USD. Across the other FX majors EUR slipped back a touch (now ~$1.0715), GBP consolidated (now ~$1.2688), as did USD/JPY (now ~159.65), NZD (now ~$0.6120) and the AUD (now ~$0.6650).
Macro wise it should be quiet in the US tonight with no major data or speeches scheduled. Though things may heat up a bit later this week around the release of US durable goods orders (a proxy for business CAPEX) (Thurs night AEST) and the US PCE deflator (the Fed’s preferred inflation gauge) (Fri night AEST), and with the first debate between President Biden and former President Trump also set to be held (Fri morning AEST). The US Fed has become more data-dependent. Hence, as outlined the past few days, we think a step down in the US core PCE deflator, combined with subdued durable goods orders might bolster US Fed rate cut bets. If realised this could exert some downward pressure on the USD.
AUD Corner
The AUD has traded in a rather contained ~0.6% range centered on ~$0.6650 over the pat 24hrs. This is inline with the consolidation in the USD (see above) with limited new economic news flow coming through to shift the dial. On the crosses, AUD/EUR (now ~0.6205) continues to track near the upper end of its 1-year range. Elsewhere, the AUD slipped back by ~0.1-0.15% versus the JPY, GBP, and CAD. Nevertheless, AUD/JPY (now ~106.10), which we believe looks stretched compared to relative long-term interest rate expectations, remains in rarefied air. As mentioned yesterday, since 1995, AUD/JPY has only traded above 106 ~0.2% of the time.
Locally, focus today will be on a speech by RBA Assistant Governor Kent (9:35am AEST) and the May reading of the monthly CPI indicator (11:30am AEST). As it is the second month of the quarter the data will include more information on services prices. This is the area of focus for the RBA given services inflation is driven by domestic economic and labour market conditions. On the back of positive base-effects, greater information on services prices, and the signal from leading cost/price indicators, we believe annual inflation re-accelerated. Analysts are looking for headline inflation to have quickened from 3.6%pa to 3.8%pa, with core inflation (i.e. the trimmed mean) hovering around ~4%pa.
In our view, further signs the improvement in Australian inflation is stalling may reinforce assumptions that the RBA is on a slightly different path to other central banks. We continue to hold the view that the start of the RBA’s easing cycle might be some time away. Markets aren’t pricing in the first RBA rate cut until mid-2025. We think the diverging economic and monetary policy trends between Australia and others, and a reduction of still bearish ‘net short’ positioning (as measured by CFTC futures) can be AUD supportive over the medium-term, particularly on some of the crosses like AUD/EUR, AUD/CAD, AUD/GBP and AUD/NZD (see Market Musings: RBA: No retreat, No surrender).
