• Shaky sentiment. US equities slip back as long end bond yields climb higher due to inflation & debt burden worries. AUD & NZD lose some ground.
• Macro data. Australian wages due today & the jobs report is out tomorrow. Data flow could challenge the markets RBA rate hike thinking.
Global Trends
Market wobbles continued overnight with a modest bout of risk aversion dragging on things like US equities (S&P500 -0.7%, NASDAQ -1.3%), copper (-2.3%) and precious metals (gold -1.9%), as well as cyclical currencies such as the AUD (now ~$0.7085) and NZD (now ~$0.5874). Interconnected worries about inflation and a ‘higher for longer’ interest rate environment dampened the mood. Oil prices remain elevated with brent crude tracking north of US$91/brl. Tensions between the US and Iran show no signs of letting up with a cargo ship struck by an ‘unknown object’ in the Strait of Hormuz and President Trump stating no talks between the two sides are currently taking place or scheduled.
The inflation pulse, combined with concerns about debt burdens, is pushing up bond yields. Yields curves are steepening as long-end yields lead the charge higher. Overnight, the US 30-year rate touched ~5.34%, its highest level since 2007, before pulling back to 5.28% late in the day. Similarly, the benchmark US 10-year yield reached a cyclical peak (now ~4.70%). By contrast, the monetary policy expectations driven front-end of the yield curve has held relatively steady with markets continuing to assign only a ~35% chance of a US Fed rate hike at the September meeting and ~38bps of tightening by next June. The upswing in yields has generated a bit of rotation by equity investors away from debt-laden AI/semiconductor stocks into more ‘defensive’ sectors. However, given the relative outperformance of the tech sector over the past few months this has weighed on the overall index with the S&P500 recording its 5th fall in the past 7 sessions.
The minutes of the last Fed meeting are due tomorrow (Thurs 4am AEST) but as new Chair Warsh is reluctant to provide forward guidance comments about the outlook may be limited. Data wise, the global business PMIs are released later this week (Friday AEST). In our view, more signs relative growth is shifting against the US and in favour of the rest of the world might exert some pressure on the USD. But, at the same time, lingering issues in the Middle East, higher oil prices (given the US’ swing to becoming a ‘net energy exporter’), and shaky risk sentiment stemming from rising bond yields could work the other way.
Trans-Tasman Zone
A modest bout of risk aversion, as illustrated by the dip in US equities, on the back of lingering US/Iran concerns and higher long-end bond yields has exerted downward pressure on the AUD and NZD (see above). At ~$0.5874 the NZD has eased down towards its ~1-year average, while the AUD (now ~$0.7085) remains near the upper end of its tight 1-month range and just above its ~6-month average. The AUD also lost ground on the major crosses with falls of ~0.2% recorded against EUR, JPY, GBP, and CNH over the past 24hrs. AUD/NZD bucked the trend with a ~0.2% rise coming through (now ~1.2062).
Today in Australia the Q2 wages data is released (11:30am AEST) and tomorrow the monthly jobs report is due. Given the increased slack in the labour market wages are expected to have slowed slightly to 3.2%pa, which if realised is a positive sign about future inflation cooling. In terms of thejobs numbers, as discussed yesterday, we believe that after a strong result in June there might have been a relative slowdown in the labour market in July given the sluggishness in the Australian economy and because school holidays coincided with the survey reference week. On balance, we think there are risks the Australian jobs report underwhelms predictions, and this might lessen the chances of the RBA delivering another rate rise this cycle. After last week’s ‘hawkish’ rhetoric the market is pricing in ~18bps of further tightening by the RBA by next March.
In our opinion, an adjustment in RBA interest rate expectations could take more heat out of the AUD, particularly as it is also looking stretched on technical indicators with the relative strength index close to ‘overbought’ levels. Moreover, as outlined before, from our perspective, given the RBA appears closer to the end than the beginning of its tightening cycle, while other central banks have room to run, the AUD’s upside potential from here may be limited. The jump up in the AUD that occurred at the start of the year reflected the repricing in Australian interest rates. But over the period ahead, more headwinds than tailwinds appear to exist. The list includes the unfolding slowdown in Australian growth, issues for global/Asian growth because of energy supply, and valuation worries across AI/tech stocks.
