• Positive vibes. Markets hopeful another round of US/Iran talks yield positive results. Oil lower, equities higher. USD weaker. AUD at multi-week high.
• Macro pulse. IMF downgraded global outlook. Australian business & consumer confidence tumbled. Conflict casting a long shadow over world economy.
Global Trends
Short-term sentiment driven markets have been in ‘glass half full’ mode overnight. Investors looked through the blockade of the Strait of Hormuz and lasered in on the prospect of another round of talks between the US and Iran, with reports suggesting they could be held over coming days. The current ceasefire is due to expire next week. Hopes these possible discussions yield a durable agreement supported risk assets. Oil prices have fallen with Brent crude shedding ~5% to be below US$95/brl. Bond yields are also lower with US rates declining ~3-5bps across the curve. The benchmark US 10yr yield is hovering near its 1-year average (now ~4.25%). Elsewhere, equities rose with the US S&P500 climbing 1.2% to be within striking distance of its pre-conflict peak. In FX, the USD lost ground. EUR is approaching ~$1.18 (a ~6-week high), GBP is at ~$1.3566, and USD/JPY has slipped under ~159. Cyclical currencies like the NZD (now ~$0.59) and AUD (now ~$0.7126) appreciated with AUD tracking where it was at the time the US/Iran conflict kicked off in February.
As discussed the past few weeks and illustrated by recent events the situation in the Middle East is fluid and given the players involved bursts of volatility should be anticipated for a while yet. The current positive vibes might not last, while the economic fallout from the conflict is closer to the beginning than the end given disruptions to energy and supply-chains could take months/quarters to clear up, not days/weeks. Indeed, in its latest World Economic Update the IMF downgraded its growth forecasts with the global economy predicted to expand by ~3.1% in 2026. Notably, this assumed oil prices average ~US$82/brl this year. Under its ‘adverse scenario’, where oil averages ~US$100/brl, global growth is estimated to slow to ~2.5%. An even larger stepdown, towards the IMF’s ~2% ‘global recession’ benchmark is estimated to occur if oil averages even higher levels under a ‘severe’ scenario. At the same time growth is being downgraded, inflation pressures are building. Although US producer prices didn’t rise as much as feared in March, at ~4%pa wholesale inflation is at a ~3-year high, and there is likely to be another steep jump in the April figures as the energy impact flows through.
The situation in the Middle East looks set to remain in the drivers seat in the near-term. The bout of optimism about future talks may extend a bit further. However, the conflict is set to cast a long shadow over the global economy. Over coming months global growth will be weaker and inflation higher than where it was predicted at the turn of the year. In our view, the uneasy economic backdrop, coupled with a higher level of oil prices (given the US’ swing to becoming a ‘net energy exporter’) can limit how far the USD pulls back.
Trans-Tasman Zone
The upbeat tone across markets stemming from hopes future US/Iran talks could result in a durable conflict resolution, combined with a softer USD, have boosted the NZD and AUD (see above). At ~$0.59 the NZD is at a multi-week high, and slightly above its ~1-year average. The AUD (now ~$0.7126) is up where it was trading before the US/Iran conflict started in February, over 4% above its late-March low and not that far from its cyclical peak. The AUD held its ground on the major crosses with AUD/EUR tracking near ~0.6040, while AUD/JPY is north of ~113, and AUD/CNH is above its ~50-day moving average.
Macro wise, the energy price jump and recent interest rate hikes were on display in the latest Australian confidence data. Consumer and business sentiment tumbled to well below average levels with the surge in input costs unnerving firms and worries about family finances on consumers minds. RBA Deputy Governor Hauser also spoke. The bulk of his comments were focused on explaining the RBA’s interest rate U-turn in early 2026. In terms of the outlook Hauser noted policymakers are focused on the tradeoff between the upside inflation risks and prospect of slower growth. It is a tricky path for policymakers to navigate. Markets are pricing in a ~67% chance of another RBA rate rise in May, with ~2 more hikes factored in by year-end. If realised, this would take the RBA cash rate to ~4.6%.
Looking ahead, the monthly jobs report is the next major local data event (released Thursday). The reference week for the March jobs data is early in the month; hence the timing of Easter shouldn’t cause issues. We expect the employment figures to show labour market conditions remain ‘tight’, reinforcing the case for the RBA to raise rates again. That said, global events, particularly the situation in the Middle East, should remain in the AUD driver’s seat. As flagged, the effect on supply-chains and global energy could take some time to clear up. This in turn can act as a handbrake on global activity, particularly across Asia. We think that given how much more RBA tightening is already baked into the Australian interest rates curve, the global growth headwinds, and with negative domestic consequences of higher mortgage rates and fuel costs in the pipeline, more upside in the AUD (which is tracking above our ‘fair value’ estimate) might be limited.
