• Market jitters. Renewed US/Iran tensions pushed up oil prices. Long end bond yields rose again & equities slipped back. AUD & NZD a bit weaker.
• Macro pulse. RBNZ expected to raise rates today. Will its guidance point to more moves? Q2 AU GDP predicted to show sluggish growth.
Global Trends
Markets have been jittery over the past few sessions with a combination of economic and geopolitical news in the driver’s seat. Macro wise, markets have been absorbing the ‘hawkish’ message delivered by new Fed Chair Warsh at his speech at the end of last week. Chair Warsh raised a few eyebrows, and boosted the market odds of a rate hike as soon as the mid-September Fed meeting (which are now sitting at ~68%) by reiterating the commitment to the 2%pa inflation target, noting financial conditions aren’t currently overly ‘restrictive’, and indicating underlying inflation trends haven’t “meaningfully improved”. This was compounded overnight by an escalation in the US/Iran conflict which has once again raised concerns about the supply of energy via the disrupted Strait of Hormuz. There were further US strikes on Iran over the past 24hrs in response to attempted attacks from Iran on commercial shipping in the region.
Oil prices have risen with brent crude up ~5% (now US$95.20/brl). The oil related inflation impulse compounded the recent ‘hawkish’ central bank rhetoric and other structural dynamics. This mix has seen long end bond yields lift again. New multi-decade highs have been reached in many countries, including Japan, Australia, the UK, and Germany, with the benchmark US 10yr rate (now ~4.80%) at levels last traded in early-2025. Higher bond yields have dampened equity market sentiment with the major US and European indices slipping back. The US S&P500 shed ~0.7%, its 3rd straight fall, with cyclical and tech-sectors underperforming (NASDAQ -1%). In FX, the USD strengthened. EUR (now ~$1.1593) and GBP (now ~$1.3518) lost a bit of ground, and USD/JPY tracked US bond yields higher (now ~160.17). Ahead of today’s RBNZ meeting (12pm AEST), where another rate hike is widely anticipated, the NZD dipped (now ~$0.5893), as did the AUD (now ~$0.7146) with Q2 Australian GDP also in the spotlight today (11:30am AEST).
Looking ahead, US ADP employment (10:15pm AEST) is released tonight, ahead of the monthly non-farm payrolls report which is out at the end of the week (Fri night AEST). The incoming US data could generate more US interest rate and USD volatility as stronger prints may reinforce views the US Fed will lift interest rates over the next few months, while weaker readings might lessen the chances of that happening, at least in the markets eyes. On balance, we think there are slightly higher chances the US labour market data positively surprises downbeat consensus predictions. If realised, we believe this, in conjunction with the upswing in oil prices (given the US’ status as a ‘net energy exporter’) and further geopolitical/market wobbles could see the USD add to recent gains.
Trans-Tasman Zone
The shaky risk environment generated by renewed US/Iran tensions, higher oil prices and rising long-end bond yields, which have also been boosted by ‘hawkish’ US Fed rhetoric over the past week, exerted some downward pressure on the AUD and NZD (see above). That said, at ~$0.7146 the AUD is not that far from the upper end of its ~3-month range. Similarly, the NZD (now ~$0.5893) has dipped over the past few sessions but it remains north of its 1-year average.
Across the Tasman the RBNZ meets today (12pm AEST). Because of improving growth momentum and lingering inflation pressures another 25bp rate hike is widely anticipated. If realised, this would lift the RBNZ cash rate to 2.75%. Notably, this is still below ‘neutral’, hence it shouldn’t derail NZ’s economic revival given this is akin to the RBNZ taking its foot off the accelerator and not slamming on the brakes. Markets are factoring in a steady stream of interest rate rises by the RBNZ with ~4 hikes priced by next June. We think there is a chance the RBNZ raises its projections towards market thinking. Over the medium-term, we believe the mix of firmer growth and a higher level of NZ interest rates should help the NZD tick up and see crosses like AUD/NZD (which already look too high, in our opinion) gradually fall back. However, in the very near-term, given a rate rise today is almost ~100% baked into the NZ rates curve, there is a chance the NZD weakens a bit if the RBNZ fails to exceed ‘hawkish’ expectations.
In Australia, Q2 GDP is out today (11:30am AEST). The partial inputs already released point to another sluggish quarter of activity with growth of ~0.3%qoq anticipated. This would see the annual pace slow to ~1.8%pa. The increases in interest rates put through by the RBA earlier this year, higher fuel costs, geopolitical uncertainty, and unfolding downturn in housing should constrain growth over the next few quarters, in our view. The question is whether the growth pulse is weak enough to dampen inflation, or if the RBA feels the need to do even more. Slow/tepid growth, and higher unemployment, is typically the price that needs to be paid to sustainably reduce inflation. Given the RBA’s tightening bias, we think the late-September meeting is ‘live’ and another rate hike should be up for debate, as it was at the last meeting. But for the AUD, the bigger picture story is more important than what happens at the next RBA meeting. As indicated previously, underlying dynamics suggest upside potential in the AUD from current levels might be limited. More RBA tightening is discounted into the Australian rates curve, but other central banks having further to run in their cycles. Moreover, markets have yet to contemplate the greater domestic economic pain even higher rates may inflict down the track. These factors, combined with lingering issues in the global economy, could hold back AUD/USD, in our view.
