• Holding on. Oil prices rise with no further US/Iran progress concerning markets. Bond yields tick up. AUD & NZD drifted back a little.
• RBA meeting. No change in interest rates expected. But the RBA may keep the door open to more tightening. US CPI & retail sales out later this week.
Global Trends
Outside of oil prices, which rose by nearly ~5% (the 4th straight daily rise) on the back of no further progress with regards to the US/Iran situation or reopening of the Strait of Hormuz, markets generally consolidated yesterday. US equities eased only slightly (S&P500 -0.1%, NASDAQ -0.3%) despite an uptick in bond yields (US rates increased ~5-6bps across the curve) as the rebound in oil generated renewed inflation worries. In FX, USD/JPY gained ~1% (now ~159.28) as the impact of recent FX intervention by Japanese officials faded a little more. But outside of that most of the other major currencies were little changed with falls of ~0.2% recorded by EUR (now ~$1.1544), NZD (now ~$0.5884) and AUD (now ~$0.7054).
Data released at the end of last week indicated that the cracks in the US jobs market are widening. Non-farm payrolls fell 23,000 in July and there were sizeable downward revisions to the prior few months. While the US unemployment rate ticked down to 4.1% this somewhat reflected a reduction in labour supply with the participation rate extending its downward trend (now ~61.4%, a low since Q1 2021). Notably, as our chart shows, after regularly coming in above analysts’ expectations earlier in the year the US data has recently started to underwhelm, while at the same time the data pulse outside of the US has improved. This relative swing in economic momentum has been one of the factors that has exerted downward pressure on the USD over the past few weeks. As has the repricing in US Fed interest rate expectations. Odds of a September US Fed rate hike have been pared back to ~52% with a full hike factored in by year-end and ~47bps of tightening baked in by mid-2027. This is down from ~60bps priced in a month ago.
This week in the US focus will be on the July CPI inflation data (Weds night AEST) and monthly retail sales figures (Fri night AEST). On balance, we believe the risk is that the US data shows inflation is gradually moderating, given the slack starting to appear in the labour market, and for consumer spending to soften a touch after a robust Q2. In our view, this type of mix could see markets further trim their near-term Fed rate rise bets which in turn may see the USD lose some ground.
Trans-Tasman Zone
After edging up last week on the back of improved sentiment related to the situation in the Middle East and softer US jobs data the AUD and NZD eased a little over the past 24hrs (see above). That said, at ~$0.7054 the AUD is close to the upper bound of its ~1-month range and near its ~6-month average. It is a similar story for NZD (now ~$0.5884) which is also tracking around its respective 3-month, 6-month, and 1-year averages. The AUD has slipped a little on most of the major cross-rates with falls of ~0.1-0.3% recorded against GBP, CAD, and CNH. By contrast, the re-weakening in the JPY has pushed AUD/JPY higher (now ~112.37), although it remains ~2.2% from its cyclical peak.
Today in Australia the RBA is in focus (2:30pm AEST). Governor Bullock holds a press conference after that (3:30pm AEST), with the RBA also releasing updated economic forecasts. No change in interest rates is widely expected with markets only factoring in a ~2% chance of a move today, and ~18bps of hikes by next February. While we believe the most likely outcome is for the RBA to hold steady we think that as it is in a ‘tightening cycle’ the chances of a move are higher than what is baked in. Growth momentum across the Australian economy has started to slow, and forward indicators point to an uptick in unemployment over time. However, at the same time, the level of activity is still high and exceeds supply, and while inflation looks to be tentatively moving in the right direction, it is elevated and not where it needs to be. In our opinion, this should see the RBA deliver a ‘hawkish hold’ with the Board and Governor Bullock likely to keep the door open to further interest rate rises if needed and things don’t play out as anticipated.
We believe this type of messaging may give the AUD a bit of short-run support. As could a softening in US CPI inflation (Weds night AEST) and/or sluggish US retail sales (Fri night AEST) later this week. But we remain of the view that beyond a potential further near-term rise upside in the AUD should be constrained. We feel that medium-term macro headwinds for the AUD remain beneath the surface due to the unfolding slowdown in the Australian economy, lingering issues stemming from the prolonged US/Iran conflict and disruptions to energy supply, and valuation worries across AI/tech stocks.
