• Upbeat mood. Sentiment improved overnight. US tech stocks rebounded despite a lift in yields. AUD & NZD ticked up. AUD outperformed on crosses.
• Macro pulse. Social unrest in France adding to jitters about its debt trajectory. NZ CPI tomorrow. Next week AU CPI & US Fed meeting in the spotlight.
Global Trends
Markets were in a more upbeat mood overnight with risk sentiment improving. A rebound in tech stocks, after last weeks sizeable falls, drove the overall performance with the NASDAQ (+1.1%) outperforming the S&P500 (+0.4%). Time will tell if this is just a dead-cat bounce or the start of a more durable turnaround. Given still elevated bond yields and lingering questions about lofty valuations in the tech/AI-space more bursts of volatility may be on the horizon, in our view. At ~5.14%, the US 10yr yield is in the upper end of its multi-year range.
By contrast European equities underperformed (EuroStoxx600 -0.8%) and French bond yields jumped up even further (FR 10yr +13bps to 4.93%) on the back of the civil unrest across the country which has heightened concerns about the nations debt trajectory given the interconnected issues it is grabbling with (i.e. an energy crisis, immigration, floundering economy, and fiscal worries). Things might get worse before they stabilize. But ultimately, it should be remembered that the European Central Bank has various ‘circuit breaker’ policy tools it can deploy if it becomes concerned issues in France are spilling over into the broader Eurozone economy and/or are creating systemic strains on the financial system. Elsewhere, oil prices consolidated (brent crude is near ~US$110/brl), base metals ticked up (copper +0.2%), and precious metals like gold eased. In FX, while an uptick in USD/JPY (now ~158.48) helped prop up the USD index, below the surface it was generally a story of the USD losing some ground against currencies such as the EUR (now ~$1.1213), GBP (now ~$1.3307), NZD (now ~$0.5664), and AUD (now ~$0.6979). In addition to the positive turn in US equities, a better than predicted China data batch also helped support cyclical currencies like the AUD and NZD. China’s economy grew 1.2% in Q3 with retail sales and industrial production picking up steam in the year to September. Activity in China is being powered by the global AI boom and export sector.
The global macro calendar is limited over upcoming sessions with the latest business PMIs (released Friday) a focal point. Things hot up next week with the US Fed, ECB, RBNZ, and BoJ meeting. On balance, more headline driven short-term swings in the USD might be on the cards, in our opinion. But on balance, as positioning (as measured by CFTC futures) is ‘net long’ USDs (indicating a lot of positives may already be baked in), and with the US Fed likely to hold steady next week we believe the USD could drift lower into the end of the month, barring a sustained deterioration in risk appetite.
Trans-Tasman Zone
The turnaround in risk sentiment, as illustrated by the rebound in US equities overnight, has helped the AUD and NZD perk up (see above). At ~$0.5664 the NZD is near a 1-month high ahead of tomorrow’s Q3 NZ CPI data (which looks set to show firm domestic price pressures) and next weeks RBNZ meeting (where another rate hike is ~80% priced in). As outlined over the past week or so, we thought the NZD’s torrid September spell was overdone with the currency tracking ~3 cents below our ‘fair value’ estimate. In our judgement, too much weight has arguably been given to NZ’s status as a ‘net energy importer’ and the shift in polling for the upcoming NZ General Election. We believe 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.
The AUD (now ~$0.6979) has more than recouped last week’s dip generated by the weaker Australian jobs report, and is back hovering near its ~1-month average. As mentioned post the jobs data, more labour market slack is being created as interest rate hikes begin to bite, however, overall conditions aren’t ‘loose’ enough to mean excess capacity will dampen domestic inflation by a substantial amount quickly. In our opinion, the door to more tightening by the RBA is still open given the bigger picture forces at play (i.e. the elevated level of demand across the economy, Australia’s lackluster productivity, and sticky inflation).
The quarterly Australian CPI is next week (28th October). Confirmation the inflation pulse remains uncomfortably high and north of the RBA’s target could see markets factor in higher odds of more RBA action over coming months. Markets are assigning a ~30% chance of a RBA hike on 3 November, about a 50% probability it occurs at the 8 December meeting, and a full rate rise by next May. We believe an upward adjustment in near-term RBA rate expectations may give the AUD a boost over the period ahead. Particularly as positioning metrics indicate participants are quite ‘bearish’/’net short’ the AUD, based on our thinking the USD could drift lower (see above), and as November-December has historically tended to be a more ‘seasonally’ positive time of the year for the AUD.
