• Jittery markets. Oil prices rose again, as did bond yields. Risk sentiment remains fragile. USD firmer. AUD & NZD still under pressure.
• Global pulse. RBA expected to hike rates on Tuesday. China PMIs, US PCE & US jobs report on the radar next week. More market volatility likely.
Global Trends
Familiar themes continue to be in the market driver’s seat with the mix of elevated oil prices, inflation risks, and rising bond yields continuing to dampen the mood. Oil was volatile on the back of negative and positive US/Iran related news flow with skirmishes in the region offset by reports the two sides are exploring a phased agreement to reopen the Strait of Hormuz. That said, on net, markets remain skeptical and the negative impacts on global energy supply continue to bite. Brent crude has edged up to be near US$107/brl, with Dated Brent (which is the physical spot-market price that better reflects immediate demand/supply) and refined products at elevated prices. It was a similar story in bonds with US and European rates extending their moves higher. The US 10yr (now ~5.2%) is at levels last traded in mid-2007. As outlined before, rates in this type of region have typically triggered a ‘regime shift’ in asset classes with the correlation between yields and equities turning negative (i.e. even higher yields generate falls in stocks). Will this time be different? Time will tell, but so far, the historic relationship is holding.
In FX, the USD ticked up further with EUR tracking near the lower end of its year-to-date range (now ~$1.1379) and USD/JPY pushing up towards ~159. Cyclical currencies like the NZD (now ~$0.5662) and AUD (now ~$0.7012) remain on the backfoot with the latter near late-July levels. Markets continue to factor in multiple interest rate rises by the major central banks because of inflation concerns. There are more than 4 hikes predicted by the Bank of England over the next year, ~94bps of tightening discounted by the ECB by September 2027, ~2.5 increases baked in for the RBA by June, almost 5 moves anticipated by the RBNZ by August 2027, and ~3.5 additional moves by the US Fed predicted by next June.
The data calendar is limited today but things heat up next week with the RBA (Tues), China PMIs (Weds), US PCE deflator (Weds), and US jobs report (Fri) on the radar. We remain of the opinion that the outlook for further US Fed policy tightening over the next few quarters, elevated oil prices (given the US’ status as a ‘net energy exporter’), and fragile risk sentiment could continue to support the USD over the near-term.
Trans-Tasman Zone
The firmer USD, and wobbles in risk markets because of higher oil prices, inflation concerns and rising bond yields, has exerted a bit more downward pressure on the NZD and AUD (see above). At ~$0.5662 the NZD is not that far from its year-to-date low, with NZ’s status as a ‘net energy importer’ a factor weighing on the currency at the moment. The AUD (now ~$0.7012) is at a multi-week low with further modest falls also coming through on the major cross-rates. The AUD shed ~0.2-0.4% against the EUR, GBP, NZD, and CNH over the past 24hrs. AUD/CNH (now ~4.7088) is below its 1-year average, AUD/EUR is approaching its 50-day moving average (i.e. ~0.6149), and AUD/NZD (now ~1.2385) has given back some ground but remains less than 1% from its cyclical peak.
Data wise, the volatile Australian labour force figures were released yesterday. The data was a mixed bag. Employment rebounded in August (+39,500) after the weakness the month before, but it reflected part-time work (+45,800) with full-time jobs falling. That said, greater labour supply outweighed the net employment gains and helped push the unemployment rate up to 4.6% (a new high since late-2021). The unemployment rate is moving in the direction it needs to go to create the slack across the economy required to sustainably bring down inflation. Given the usual lags between hiring/firing decisions and when it impacts the real-world data, the unemployment rate in August reflected the state of play in the economy ~6-months ago. Hence, as the rate hikes delivered since then (with more to follow) work their way through the system and the economy slows, unemployment should rise even further over coming months.
But as things stand, the broader labour market picture is still that conditions are “a bit tight” pointing to the RBA raising interest rates next week due to worries about inflation, in our view. A move next Tuesday is ~90% discounted, and markets continue to toy with the idea that the RBA cash rate might move to ~5% by May. This is quite a challenge for the debt heavy Australian household sector. From our perspective, the RBA rate hike cycle looks well priced and is arguably baked into the AUD. However, the looming hit to growth from mortgage costs, fuel prices, and housing downturn probably isn’t. We believe the more worrisome domestic outlook, and shaky global risk sentiment stemming from the jump in bond yields/inflation jitters could be headwinds for the AUD over the period ahead.
