• Positive vibes. Risk sentiment improved overnight. But earnings reports from tech stocks may generate vol. this week. AUD & NZD drifted a bit lower.
• Macro pulse. Australian Q3 CPI due (Weds). RBNZ expected to hike (Weds). US Fed, BoJ, & ECB also meeting this week. Q3 US GDP also on the radar.
Global Trends
A few push-pull forces washed through markets at the start of the new week, but on net sentiment improved a little compared to the recent torrid spell. US equities recorded solid gains with the tech sector leading the way (S&P500 +0.7%, NASDAQ +0.8%). More bursts of volatility are possible down the track with earnings reports from Alphabet, Microsoft and Amazon due this week. Focus for investors will be on the AI capex pipeline and underlying profitability trends. Elsewhere, oil prices eased slightly, however at US$115.20/brl brent crude remains elevated due to ongoing US/Iran tensions and supply constraints. As a result, the squeeze on consumers/businesses from high fuel costs shows no sign of letting up.
In the absence of top tier economic data releases US bond yields consolidated with the 10yr rate tracking near ~4.99%, ~35bps below its early-October peak but still well up from its multi-year average. Over in Europe the spread between French 10yr bonds and German Bunds narrowed after France avoided a ratings downgrade by Moody’s despite a ‘negative’ outlook and deterioration in fiscal/debt metrics since the last review. In FX, the USD ticked up overnight with safe-haven currencies like the JPY underperforming due to the improvement in risk appetite. EUR slipped back modestly (now ~$1.1176), as did GBP (now ~$1.3342), the NZD (now ~$0.5682) and AUD (now ~$0.7017).
On top of the tech sector earnings updates, central banks will also be in focus this week with the US Fed (Thurs morning AEDT), ECB (Thurs night AEDT), Bank of Japan (Friday), Bank of Canada (Weds night AEDT), and RBNZ (Weds) meeting. That said, only the RBNZ is realistically expected to move with another rate hike ~90% priced in. By contrast, there is only a ~10% chance assigned to the US Fed raising rates this week (though another increase is ~90% discounted by the next meeting in December). On balance, as positioning (as measured by CFTC futures) is ‘net long’, and with it tracking a little above our ‘fair value’ model, we believe the USD might drift back into the end of the month (barring a sustained deterioration in risk sentiment) if Fed Chair Warsh refrains from providing strong guidance and/or the upcoming US data isn’t as strong as what analysts predict (Q3 US GDP is due on Thursday night AEDT).
Trans-Tasman Zone
The modest uptick in the USD overnight exerted a bit of downward pressure on the AUD and NZD at the start of the new week (see above). However, at ~$0.5682 the NZD remains near the upper end of its ~1-month range with the upcoming RBNZ meeting (Weds) and NZ General Election (7 November) in focus. Given domestic and global inflation pressures we expect the RBNZ to raise rates again this week, and reiterate there is more work to do down the track. That said, as is often the case with the NZD around RBNZ meetings, there is a chance decisions aren’t deemed to be ‘hawkish’ enough and the currency weakens a little after the event. However, we remain of the view that sturdy/improving NZ growth, 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 ~$0.7017) is tracking just below its ~6-month average. Australian inflation is in the spotlight this week with Q3 CPI due (Wednesday). Confirmation inflation remains uncomfortably high and well above the RBA’s target due to domestic forces could see markets factor in even higher odds of further RBA action by year-end. Markets are assigning a ~60% chance of a RBA hike on 3 November, about a 80% probability it occurs by the 8 December meeting, and a full rate rise by February. It looks to be a matter of when, not if the RBA tightens policy further. Following on from Deputy Governor Hauser’s ‘hawkish’ comments last week, Assistant Governor Hunter stressed the RBA is “not quite yet” done fighting inflation. The RBA faces hard choices given high/sticky inflation and signs growth is slowing/unemployment is rising. In our view, inflation should win out and force the RBA’s hand to do more. Slower growth/higher unemployment is the price that needs to be paid to break the back of inflation.
There will be bumps along the way, but we believe a further upward adjustment in near-term RBA rate expectations may give the AUD more of a boost over the period ahead, especially as positioning metrics indicate participants remain ‘bearish’/’net short’ the AUD, based on our thinking the USD could ease (see above), and as November-December has historically been a more ‘seasonally’ positive time of the year for the AUD.
