• Trump trades. US long end yields, equities, & the USD tick up. Weekend developments have bolstered expectations Trump might be re-elected.
• Fed pricing. US data is supporting Fed rate cut bets. Last week US CPI underwhelmed. The divergence with the RBA is underpinning the AUD.
• Event Radar. US retail sales due tonight. ECB meets on Thursday night. Q2 NZ CPI (Weds) & the Australian jobs report (Thurs) also on the schedule.
Economic trends butted up against geopolitical developments at the start of the new week. These cross-currents look set to be in place for some time. After losing more ground over the back end of last week following the soft US CPI inflation reading, US bond yields and the USD ticked up over the past 24hrs as the weekend assassination attempt on former President Trump bolstered expectations he might win the early-November election. As our chart shows, odds of a win by former President Trump (as measured by PredictIt) have extended their upswing which had already received a large leg up following President Biden’s poor showing in the recent debate.
Market moves reminiscent of the ‘Trump Trades’ that dominated during his term in office have been somewhat rekindled. The US yield curve steepened with the benchmark 10yr rate rising ~5bps (now 4.23%) and the policy driven 2yr rate holding steady (now ~4.46%, the bottom end of its ~5-month range). US equities outperformed with the S&P500 edging higher (+0.3% vs EuroStoxx600 -1%) thanks to strength in sectors like energy and financials that previously benefited from deregulation. The modest rebound in US yields generated a bit of renewed USD support, though it remains ~1.6% below where it started July with US Fed rate cut pricing acting as an offsetting downward force. Notably, Fed Chair Powell spoke again overnight and he stated that after the run over the past couple of months policymakers are becoming more convinced inflation was on a path back to target and that ‘policy balance’ is something he is focusing on. Markets are now factoring in the first Fed rate cut in September with three moves fully discounted by January.
Elsewhere in FX, EUR is hovering just under ~$1.09, GBP is near ~$1.2970, and USD/JPY is back down around ~158 after it fell sharply in the wake of last week’s US CPI print due to another bout of suspected intervention by Japanese authorities aimed at propping up the weak yen and creating more two-way risk in the currency. The NZD has unwound its US inflation driven bounce to be back under its 200-day moving average (~$0.6078). The AUD has lost a little ground (now ~$0.6760) after touching a fresh multi-month high.
Tonight, attention will be on US retail sales (10:30pm AEST). At 3/4’s of US GDP household consumption is the engine room of the US economy. Retail turnover in the US has flatlined so far over 2024 as tighter credit conditions and lower confidence bite. We think the risks are tilted to another subpar result (mkt consensus -0.3%). More signs US consumers are under pressure should reinforce views that rate cuts by the US Fed are coming closer into view. This, and a cautious tone from the ECB later this week (Thursday night AEST) about the speed and size of future rate cuts, may counteract any Trump drive support and see the USD slip back, in our opinion.
AUD Corner
After hitting a fresh multi-month high late-last week in the wake of the soft US CPI print and jump up in US Fed rate cut bets, the modest rebound in long-end US yields and the USD has exerted a bit of pressure on the AUD over the past 24hrs. Also weighing on the AUD a little was the dip in base metal prices (copper -1.8%, iron ore -1.5%) with the lackluster Q2 China GDP growth (4.7%pa vs mkt 5.1%pa) dampening sentiment. That said, at ~$0.6760 the AUD is still up near the top-end of the range it has occupied since early-January. On the crosses, the AUD has slipped back a touch against EUR (-0.3% to ~0.6205) and GBP (-0.2% to ~0.5213), with the pull-back in AUD/JPY (now ~106.85) following last week’s suspected intervention by Japanese authorities also extending. AUD/JPY is ~2.2% below last week’s multi-decade peak. We continue to think that AUD/JPY is too high given it has diverged significantly from relative Australia-Japan long-term interest rate expectations.
Tonight, US retail sales are released (10:30pm AEST). We think the data could show household consumption in the US, a key driver of US economic activity, remains subdued on the back of tighter credit conditions and deteriorating fundamentals. In our view, a soft US retail sales report might reinforce US Fed rate cut pricing, dragging on US yields and the USD. The diverging policy expectations between the US Fed and RBA, and shift in Australia-US yields differentials should continue to be AUD supportive, in our opinion. In addition to the US retail sales data these macro trends may be bolstered by the upcoming Australia labour market report (released Thursday). Another solid showing via positive jobs growth (mkt +20,000) and/or low unemployment (mkt 4.1%) could solidify expectations the RBA is on a different path to its global peers. Markets are assigning a ~22% chance the RBA hikes rates again in August with the first RBA rate cut not fully factored in until August 2025.
Elsewhere, AUD/NZD continues to power ahead with the pair around its highest level since October 2022 (now ~1.1133). As outlined previously we believe there is more room to run in AUD/NZD with our long-held forecast being for it to edge up towards ~1.13 by Q4 (see Market Musings: AUD/NZD – Diverging macro fundamentals). The contrasting economic and policy outlook between Australia and NZ could be fortified over coming days. In addition to the chances of another positive Australian jobs report (Thurs), NZ Q2 CPI (released Weds) is likely to show a stepdown in headline inflation (from 4%pa to 3.4%pa) with domestic/non-tradeables inflation also cooling.
