• Positive tone. Solid tech sector earnings supported US stocks. Bond yields consolidated. AUD & NZD continue to grind up. AUD near ~6mth average.
• AU trends. RBA Deputy Gov. Hauser reiterated that inflation challenges remain. Odds of another hike by year-end rise. Q4 AU CPI due next week.
Global Trends
The more upbeat tone in markets continued overnight. Solid earnings results from a few megacap tech stocks eased worries (at least in the near-term) about the sustainability of capital investment spending and returns. The US S&P500 edged up ~0.6% to be within striking distance of its record highs, while the tech-focused NASDAQ outperformed (+1.1%). European equities also rose (EuroStoxx600 +0.9%). Elsewhere, bond yields ticked up with the US 10yr yield hovering towards the upper end of its multi-year range (now ~5.12%). Elevated oil/energy prices continue to underpin global inflation, and with brent crude near US$110/brl there are also growth challenges for businesses and households that use a lot of fuel. Over in Europe, France’s 10yr bond yield breached 5% for the first time since 2002 and the spread to its German equivalent widened. Concerns about France’s debt trajectory remain front of mind and they are unlikely to go away soon given parliamentary deliberations regarding the budget may drag on for weeks.
In FX, the USD index consolidated with EUR (now ~$1.1230) and USD/JPY (now ~158.11) treading water. GBP was a touch firmer (now ~$1.3391). UK inflation accelerated to 3.5%pa in September, its fastest pace in about a year. Notably, the lift wasn’t just due to oil prices with services inflation (which is domestically driven) also quickening. The UK inflation pulse coupled with robust jobs data released earlier this week (employment strengthened and the unemployment dipped) has bolstered the case for the Bank of England to tightening policy. An early-November BoE rate hike is now almost fully priced in, with 4 hikes over the next 6 meetings discounted. The positive risk backdrop also supported the NZD overnight (now ~$0.5695) with the AUD (now ~$0.7022) also boosted by ‘hawkish’ rhetoric from RBA Deputy Governor Hauser that increased the odds of a Melbourne Cup day rate rise.
As outlined a few days ago, the global macro calendar is limited until the latest business PMIs are released on Friday. Things heat up next week with the US Fed, ECB, RBNZ, and BoJ meeting. More headline driven swings in the USD might be on the cards intra-session, however, on balance, as positioning (as measured by CFTC futures) is ‘net long’, with the US Fed likely to hold steady next week, and with it tracking a little above our ‘fair value’ model, we believe the USD could drift back further into the end of the month (barring a sustained deterioration in risk appetite).
Trans-Tasman Zone
Positive risk vibes (as illustrated by equity market gains overnight) and lack of major negative geopolitical news has helped the AUD and NZD edge up further the past 24hrs (see above). At ~$0.5695 the NZD is hovering near the top of its ~1-month range. A slightly softer than predicted Q3 NZ CPI report hasn’t generated too much of an impact. NZ headline inflation slowed to 3.7%pa as fuel prices retreated. However, the more recent jump in costs because of renewed Middle East tensions points to NZ inflation re-accelerating in Q4. As outlined over the past week or so, we thought the NZD’s weak run in September was overdone with the currency tracking ~3 cents under our ‘fair value’ model. In our view, too much weight has arguably been given to NZ’s status as a ‘net energy importer’ and the swing in polling for the upcoming NZ General Election. We think macro forces such as sturdy/improving NZ growth momentum, elevated agricultural prices, and outlook for a stream of further RBNZ rate rises could see NZD/USD grind up (and AUD/NZD lose altitude) over the medium-term. A RBNZ rate increase next week is ~70% priced in with ~4 moves anticipated by August 2027.
The AUD (now ~$0.7022) has continued to claw back lost ground and is not that far from its ~6-month average. When speaking yesterday RBA Deputy Governor Hauser stressed that the inflation challenge is far from over, noting the outlook “looks materially worse” than the August projections. According to Hauser the RBA “must” prevent shocks from feeding into expectations and “where the shock is persistent you have to react”. Moreover, he added that while the labour market is “easing” more is probably needed. The RBA faces hard choices given still high/sticky inflation and signs growth is slowing/unemployment is rising. But in our view, inflation should win out and force the RBA’s hand to do more.
The quarterly Australian CPI is released next week (28th October). Confirmation inflation remains uncomfortably high and well north of the RBA’s target could see markets factor in even higher odds of further RBA action by year-end. Markets are assigning a ~57% chance of a RBA hike on 3 November, about a 75% probability it occurs at the 8 December meeting, and a full rate rise by February. We believe a further upward adjustment in near-term RBA rate expectations might give the AUD even more of a boost, especially as positioning metrics indicate participants are ‘bearish’/’net short’ the AUD, based on our thinking the USD could ease lower (see above), and as November-December has historically tended to be a more ‘seasonally’ positive time of the year for the AUD.
