• Market nerves. Middle East news pushes up oil & inflation worries boost bond yields. US equities decline. USD firmer. AUD & NZD weaker.
• AU jobs. Employment stronger than predicted. But unemployment above RBA’s forecast. Q2 CPI due next week. AUD facing global headwinds.
Global Trends
Nervousness across financial markets has intensified with risk sentiment weakening further overnight. Escalating tensions in the Middle East are renewing concerns about inflation and what it might mean for interest rates. In addition to the fighting around Iran, which is disrupting shipping via the Strait of Hormuz, attacks in the Red Sea are threatening the alternative route some nations such as Saudi Arabia have been using to keep supply flowing. On top of that President Trump continues to stress that strikes on Iran may step up as he is “close to making a decision” on a “massive attack” he is considering.
In response, oil prices have extended their push higher with brent crude above US$100/brl for the first time since late-May, ~44% above the low point touched at the start of this month. The oil led inflation worries are applying upward pressure on bond yields with the US 2yr (now ~4.35%) and 10yr (now ~4.69%) at levels last traded in early 2025. Markets are factoring in a US Fed rate hike by September, with a second move discounted by next March, and a ~33% chance assigned to an increase being announced next week. This, coupled with concerns about the scale of capex in the AI sector, have dragged on US equities (S&P500 -1.2%) with the tech-sector underperforming (NASDAQ -2.2%). In FX, the USD is firmer with GBP (now ~$1.3315) and EUR (now ~$1.1378) dipping, and USD/JPY edging higher (now ~163.83). As expected, the ECB kept interest rates steady last night, however upside risks to inflation were noted and President Lagarde gave a nod to market pricing, which sees another increase being announced in September. Elsewhere, the NZD weakened (now ~$0.5770), as has the AUD (now ~$0.6967).
As mentioned yesterday, based on the rhetoric/actions from both sides the risks reside with the situation in the Middle East getting worse before it improves. Disruptions to energy shipped from the region, combined with elevated prices, are headwinds for the global economy. We think the shaky backdrop, elevated US interest rate expectations, and higher oil prices can underpin the USD in the near-term given the shift in yield differentials and the US’ standing as a ‘net energy exporter’.
Trans-Tasman Zone
On the back of Middle East developments, rise in oil prices, and spillover impacts on inflation and interest rate expectations, as well as jitters around capex spending across the AI sector, the NZD and AUD have been under pressure(see above). At ~$0.5770 the NZD is back near its ~1-month average, with NZ’s ‘net energy importer’ status creating headwinds for the currency. The AUD (now ~$0.6967) is back where it was tracking at the start of the week with yesterday’s intra-jump generated by a positive jobs report more than unwinding.
Data wise, the volatility in the monthly Australian jobs stats was on display once again with employment growing much more strongly than predicted in June (+76,300). Part-time jobs led the way (+47,000). Though a chunk of that looks to reflect some seasonal adjustment ‘statistical jiu jitsu’ given there were a number of people reportedly hired in May but who didn’t start until June. Nevertheless, the increase in labour supply also meant the unemployment rate held steady at 4.4%. This is arguably a better guide of the state of play as it strips out noise in other parts of the report. And as our chart shows, unemployment is above where the RBA had penciled it to be in Q2. Leading indicators point to a further lift in unemployment over H2 as the slowdown in the economy generated by interest rate hikes gains more traction.
On the back of the jobs data markets have increased the odds of another RBA rate hike being delivered in August (now ~37%), though an increase isn’t fully factored in until December. Q2 Australian CPI inflation is due next Wednesday. This could generate more volatility in RBA interest rate expectations and the AUD. As things stand, we don’t think the RBA will deliver another hike next month, though it should continue to ‘talk tough’. On balance, and as seen again overnight, offshore developments are more in the AUD’s drivers seat than domestic news. We believe the shaky risk backdrop generated by wobbles across AI-stocks, renewed Middle East tensions, and subpar global growth should continue to win out and that the AUD is facing more headwinds over the near-term, especially as it appears stretched relative to yield spreads, in our opinion.
