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• Market jitters. European/US equities gave back some ground, as did industrial metals. Global growth concerns also gave the USD a bit of a boost.
• AUD underperforms. The global backdrop more than counteracted the positive Australia economic data. Black Friday helped retail sales exceed expectations.
• AU inflation. The monthly CPI indicator is released today. Headline CPI is forecast to slow, but the RBA is more focused on core & services inflation.

Risk sentiment soured a bit overnight. European and US equities gave back some of the gains from a day earlier (EuroStoxx50 -0.4% and US S&P500 -0.2%), US bond yields eased ~1-2bps (the 10yr rate is now 4.01%), and despite the rebound in oil (WTI crude rose 1.8%) industrial metal prices declined. Copper, iron ore, and aluminium shed ~1.5-1.6% over the past 24hrs with global growth concerns front of mind. Data released overnight showed that industrial production in Germany, a global manufacturing powerhouse, contracted by 0.7% in November to be nearly 5% lower compared to a year ago. This is the 6th straight monthly fall, and with business sentiment quite gloomy and other gauges like German truck toll mileage declining, expectations that this negative run may continue are elevated.

The backdrop generated some USD support, though stepping back shows that the USD Index remains near the middle of its 2024 range. EUR has dipped to ~$1.0930 with markets factoring in a touch more easing by the ECB (~140bps) relative to the US Fed (~138bps) over 2024. GBP also softened (-0.3% to ~$1.2707) with interest rate markets discounting ~5 rate cuts by the BoE this year. Elsewhere, USD/SGD has ticked back over ~1.33, while USD/CNH is just under its 50-day moving average (~7.1906). The AUD has slipped back to ~$0.6686. Outside of the intra-day dip in the wake of last Friday’s US payrolls data, this is the bottom of the AUD’s 2024 range.

Ahead of the latest read of US inflation (released Fri AEDT), a speech by NY Fed President Williams on the 2024 outlook (tomorrow 7:15am AEDT) and swings in risk sentiment should be the market drivers. When speaking in mid-December Williams noted that talk of a rate cut as soon as March, which markets are assigning a ~63% chance, was ‘premature’. We agree. Based on our analysis of past cycles and the Fed’s ‘policy rules’ we believe a steady stream of reductions from mid-2024 is more likely (see Market Musings: US Fed pivot has further to run). While push back on March Fed rate cut expectations by Williams may give the USD a little more near-term support, signs US core inflation is continuing to moderate should, in our opinion, reinforce longer-term policy easing assumptions. If realised we think this may exert renewed downward pressure on the USD later in the week.

AUD corner

Shaky risk sentiment overnight (as illustrated by the dip in equities and industrial metal prices) on the back of global growth jitters has weighed on the AUD. At $0.6686 the AUD is near the bottom of the range it has occupied since mid-December and ~2.7% below its late-December multi-month peak. The backdrop has seen the AUD underperform on the crosses. The AUD has weakened by ~0.2-0.4% against the EUR, JPY, NZD, CAD, and CNH over the past 24hrs.

The global/market environment has more than counteracted the positive set of Australian economic data. Building approvals recorded their 2nd straight monthly gain in November (+1.6%), and Black Friday sales helped retail turnover rise by 2% with strong increases in household goods, department stores, and clothing & footwear coming through. While the shift in spending patterns and bring forward of consumption to November is likely to see a drop in December we think the surging population should help cushion the blow and a steep drop is unlikely.

Today, the November reading of the monthly CPI indicator and quarterly job vacancies are released (11:30am AEDT). As November is the mid-month of the quarter the data will have better coverage of services prices. We would also note that many household goods are only surveyed in the first month of the quarter, hence the Black Friday/Cyber Monday discounts may not be captured. Although annual headline inflation is forecast to slow (mkt 4.4%pa from 4.9%pa), we believe signs services (and core) inflation remains ‘sticky’ given faster wages and other input costs may continue to keep the RBA on edge and can help the AUD recapture lost ground, especially on the crosses.

While we don’t see the RBA raising interest rates again, we continue to think that domestic inflation trends, especially around services, the support to aggregate demand from a larger population, and support from the incoming Stage 3 tax cuts is likely to see the RBA lag its counterparts in terms of when it starts and how far it goes when the next global policy easing cycle unfolds. FX is a relative price. This divergence should, in our view, see short-dated yield differentials shift in favour of a higher AUD over the next few quarters, particularly when coupled with our expectation activity in China should improve as policy stimulus actions gain traction, and the downtrend in global bond yields continues as the major central banks start to ease policy.

AUD levels to watch (support / resistance): 0.6610, 0.6650 / 0.6720, 0.6780

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