• Headline noise. Conflicting Middle East news generated a few bursts of volatility. US bond yields & USD ticked up. NZD & AUD lost a bit of ground.
• Macro events. Eurozone CPI tonight. US non-farm payrolls due later this week. Australian Q1 GDP out on Wednesday. RBA Gov. Bullock also speaks (Thurs).
Global Trends
Middle East-related headlines knocked markets around a little overnight. Uncertainty about a durable peace deal remains and skirmishes between opposing forces continued over the weekend. Conflicting comments generated a few intra-session bursts of volatility yesterday. On the one hand, Iranian media reported the country would suspend talks with the US in protest over Israel’s attacks in Lebanon. On the other, President Trump initially said that “going silent would be very good” but this was later contradicted by his social media post stating “talks are continuing, at a rapid pace”. As has been the case for several weeks, given the participants involved more bouts of headline volatility could be on the cards for a while. And as mentioned previously, the conflict might only be ‘phase 1’ with the spillover impacts on supply chains and energy set to cast a long shadow on the world economy. As the chart below shows, shipping traffic via the Strait of Hormuz remains minimal and it may take months/quarters for that to normalise, not days/weeks.
In terms of markets US equities eked out small gains with the S&P500 (+0.3%), which is at record highs, rising for the 8th straight session. Oil prices whipped around with brent crude trading in a ~US$6 range before settling near US$95.25/brl. US and European bond yields edged up with US rates ~2-3bps higher across the curve. The US 2-year yield (now ~4.03%) is near the top of its multi-month range with markets factoring in policy tightening by the US Fed over the next year. Markets are fully discounting a US Fed rate hike by March 2027. A run of solid US data has supported the upward repricing over the past few weeks. The latest US manufacturing ISM moved further into ‘expansionary’ territory with positive details such as rising new orders and lower prices paid coming through. In FX, the USD ticked up with EUR slipping (now ~$1.1634) and USD/JPY nudging up towards ~160. The NZD dipped (now ~$0.5937) after last week’s strong rise stemming from the ‘hawkish’ rhetoric at the RBNZ meeting. The AUD also gave back a bit of ground (now ~$0.7163).
Looking ahead, Eurozone CPI inflation is released tonight (7pm AEST), as are US JOLTS job openings (12am AEST). Later this week the monthly US jobs report is a focal point (Fri night AEST). We think the pickup in momentum across the US economy over early-2026 might see the US jobs report exceed rather downbeat looking consensus predictions. If realised, we believe this may bolster the growing market view that the US Fed may need to raise interest rates down the track, which in turn could see the USD strengthen.
Trans-Tasman Zone
The pockets of Middle East related volatility generated a few intra-session swings in the AUD and NZD yesterday (see above). On net, the AUD (now ~ $0.7163) has slipped back a little to be below its 1-month average. The NZD (now ~$0.5937) also weakened, but that comes after last week’s strong rise generated by ‘hawkish’ rhetoric and updated RBNZ forecasts which opened the door to a rate hike as soon as the next meeting in July. Markets are now factoring in more than 3 RBNZ rate rises by year-end and ~115bps of tightening by next May. This adjustment has also exerted downward pressure on AUD/NZD which at ~1.2066 is around the bottom end of its multi-week range.
In Australia, RBA external board member Harper speaks today (10:30am AEST), and more inputs for Q1 GDP (which is released on Wednesday) are due. The Q1 GDP report is likely to be the last “clean” read before the Middle East conflict generates volatility in various components over Q2/Q3. On balance, quarterly growth seems to have slowed to ~0.5%, though this would keep the annual pace at ~2.6%pa. That said, the path ahead looks more difficult with the jump in interest rates and fuel costs set to weigh on activity across various sectors such as housing, construction, logistics, and consumption. Moreover, 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 view. This is largely priced in (another ~23bps of RBA tightening is discounted by next February) but it would generate even more headwinds for the economy.
We continue to think it will be difficult for the RBA to be more ‘hawkish’ than what is factored in. By contrast, expectations other central banks might be hiking rates more aggressively over H2 2026 are continuing to build. This makes us believe relative yield differentials may have peaked and might start to gradually turn against the AUD over the period ahead. This, combined with the unfolding slowdown in Australian economic growth, challenges faced by the global/Asian economy from the prolonged 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.
