• Shaky markets. Long end US bond yields continue to rise. US equities slip back again. USD firmer. AUD & NZD on backfoot. AUD at late-July levels.
• Macro pulse. Expectations for a back-to-back RBA hike trimmed. But risk remains. US ISM & jobs report in focus over the next few days.
Global Trends
Underlying risk sentiment remains shaky with the upswing in long end bond yields still front of mind for investors. US equities failed to hold on to modest early session gains generated by downward revisions to the US PCE deflator (the US Fed’s preferred inflation gauge) and a paring back of October US Fed rate hike expectations with the S&P500 posting another fall (-0.3%, its 5th decline in the past 6 sessions). As outlined before, the jump up in yields (the US 10yr (now ~5.28%) touched its highest point since mid-2007 and is ~53bps above where it ended last month) has dampened the market mood over the past few weeks with the S&P500 recording its 3rd monthly fall since May. At the same time, the USD ticked up a bit more with EUR (now ~$1.1332) near lows last traded in May 2025 and USD/JPY (now ~157.37) back around its 1-year average. The NZD (now ~$0.5634, close to its year-to-date low) and AUD (now ~$0.6946, a ~2-month low) remain on the backfoot.
Data wise, as mentioned, methodology/technical changes meant the US core PCE deflator was revised lower and is now tracking at ~3%pa. This is closer to the range of other measures of US inflation. That said, it still isn’t where it needs to be and as illustrated by business surveys there is a positive inflation impulse in the US/global economy. This means that while the US Fed may hold off from hiking again in October, it isn’t guaranteed and more tightening is probably needed to break the back of inflation. Markets are assigning a ~36% chance of a Fed rate rise in late-October, with another move fully discounted by December and ~3 increases factored in by next June. This also reflects the resilience in the US economy. Real US consumer spending rose 0.6% in August, there were upward revisions to Q2 US GDP (now ~2.2%saar), and the Chicago PMI hit a multi-month peak.
Looking ahead, the US ISM manufacturing survey (12am AEST), speeches by several US Fed members, and monthly US jobs report (Fri night AEST) should be the macro focal points. On balance, given the strength in the US economy over the past few months we see a risk the incoming US employment data exceeds predictions of softer momentum in September. If realised, more signs the US labour market is holding up could reinforce views the Fed has more work to do. We remain of the opinion that the outlook for further US Fed policy tightening, elevated oil prices (given the US’ status as a ‘net energy exporter’), and fragile risk sentiment may continue to support the USD over the near-term.
Trans-Tasman Zone
The shaky global backdrop stemming from elevated oil prices, inflation pressures, and rising bond yields, coupled with the firmer USD has exerted more downward pressure on the NZD and AUD the past few days (see above). At ~$0.5634 the NZD is around its year-to-date lows with NZ’s status as a ‘net energy importer’ also a factor at play weighing on the NZD. The AUD (now ~$0.6946) is near a ~2-month low and ~4% from its early-September highs with the AUD also losing ground on the cross-rates. AUD/EUR (now ~0.6130) is close to its ~6-month average, AUD/JPY (now ~109.30) is at the bottom of its multi-month range, AUD/NZD (now ~1.2329) has drifted back a little, and AUD/CNH (now ~4.6598) is not that far from its 2026 low point.
Also exerting pressure on the AUD has been a bit of a rethink about how high Australian interest rates may rise this cycle. As widely anticipated, the RBA raised rates by another 25bps on Tuesday. This puts the cash rate at 4.6%, its highest since 2011. And while the RBA reiterated it will “do what it considers necessary” to get inflation to target including raising the cash rate “further if needed”, markets don’t seem as convinced given the unfolding slowdown in the Australian economy and yesterday’s slightly weaker than forecast August CPI (headline inflation quickened, but at 4%pa it was slightly less than analysts had penciled in). Odds of a back-to-back move by the RBA have been trimmed to ~31%, with another hike not fully discounted until March and ~33bps of tightening factored in over the next year.
We think markets may have jumped the gun a little and might now be underpricing the risk of another RBA rate hike by year-end. The next Australian CPI print, released late-October, is a more detailed quarterly report. The underlying pulse for trimmed mean in the monthly series is running north of where the RBA was factoring it in for Q3 (~1%qoq vs RBA ~0.85%). This faster run-rate and global pressures point to the RBA upgrading its inflation forecasts in November, which in turn could keep about another hike over the next few meetings on the table.
That said, for the AUD, as mentioned previously, the strong support from the string of RBA rate rises that underpinned the appreciation earlier in the year is behind us. FX is a relative price, and other central banks are now on the move. As stressed, a higher RBA cash rate should translate to a higher average level in the AUD compared a few years ago (i.e. AUD averaged ~$0.6525 over 2024/25), but it does not equate to more AUD upside. We think the more worrisome domestic economic environment, fragile risk sentiment, and firmer USD could exert more downward pressure on the AUD in the short-run. See Market Musings – RBA: once more, with feeling.
