• Push-pull forces. Positive US jobs offset by US rejecting Iran’s latest offer. US equity futures dipped & oil higher this morning. AUD at elevated levels.
• Macro news. Australian budget in focus (Tues night). In the US, CPI inflation is due (Tues night). US producer prices & retail sales out later in the week.
Global Trends
Risk sentiment ended last week on positive footing as hopes for a US/Iran deal were compounded by a better than expected US jobs report. US non-farm payrolls surprised to the upside, rising by 115,000 in April. This broke the zig-zag pattern observed over the past few months, and the details were largely positive with a good breadth of jobs growth across sectors. US unemployment continues to hover at ~4.3%, inline with its one-year average. That said, it wasn’t all positive macro news out of the US with the University of Michigan consumer sentiment index showing a further deterioration in confidence about the future and conditions because of worries about higher prices. On net, US equities continued to march higher with the S&P500 (+0.8%) and tech-focused NASDAQ (+1.7%) reaching fresh record highs. US bond yields eased back a little and the USD index softened.
However, the market mood has soured in this mornings early Asian trade after US President Trump rejected Iran’s response to the latest proposal to end the conflict. According to President Trump the Iran’s offer is “totally unacceptable”. US equity futures have lost ground (S&P500 futures -0.3%), brent crude oil prices have risen (now ~US$103.95/brl), and the USD index has edged up. EUR has dipped slightly /(now ~$1.1764), USD/JPY is treading water (now ~156.90), and cyclical currencies like the NZD (now ~$0.5950) and AUD (now ~$0.7234) have softened a fraction.
As mentioned previously, given the participants involved more bursts of Middle East related market volatility should be anticipated for a while yet. More broadly, we remain of the view that the conflict might only be ‘phase 1’ with spillover effects on supply chains and energy set to cast a long shadow on the world economy. As these aftershocks manifest there could be more market swings down the track. In the short-run, in addition to Middle East news, attention will also be on the US data with CPI (Tues night AEST), producer prices (Weds night AEST), and retail sales (Thurs night AEST) due. Several US Fed members are also speaking this week. The impacts on inflation from the Middle East conflict could start to show more clearly in the April data. Consensus is looking for headline inflation to accelerate to 3.7%pa. We believe the mix of quickening inflation and/or resilient US consumer spending might raise the risk the US Fed may need to contemplate rate hikes later this year. An upward adjustment in US interest rate expectations could give the USD a boost.
Trans-Tasman Zone
The cross-currents of Friday’s optimistic market tone and this mornings renewed concerns about the state of play in the US/Iran conflict have pushed/pulled on the AUD and NZD (see above). On net, the NZD (now ~$0.5950) is broadly inline with where it was tracking this time on Friday and the AUD is a bit higher (now ~$0.7234). The AUD remains within striking distance of its multi-year peak with strength on the cross-rates an underlying support. AUD/JPY (now ~113.28) is tracking towards the upper end of its multi-decade range, AUD/EUR (now ~0.6140) is close to its ~5-year average, AUD/CNH (now ~4.9121) is around its multi-year top, and AUD/NZD (now ~1.2140) is hovering around levels last traded ~13-years ago.
This week in Australia the Federal Budget is in the spotlight (Tuesday 7:30pm AEST). This budget will be framed by an energy price shock which is increasing inflation, slowing growth, and generating policy/geopolitical uncertainty. Given the Australian economy is operating in a state of ‘excess demand’ and inflation is too high decisions need to be made to reduce government spending and/or increase government revenues. Not an easy task given politicians always have an eye on re-election and households/businesses have become used to support being provided. Based on what has been reported reforms to the National Disability Insurance Scheme could create savings over coming years, and there will also be changes to things like capital gains tax and negative gearing. At the same time, there may be a one-off income tax break of $200 to $300 for individuals, and the cut to the fuel excise could be extended. On balance, signs there may be aggregate ‘fiscal contraction’ over the next 12-18 months would be helpful in bringing demand/supply back into balance and support (rather than fight against) the RBA’s moves to slow inflation.
For the AUD, we continue to think that more medium-term headwinds than tailwinds are forming. The interest rate curve is factoring in another ~38bps of RBA tightening by year-end. We believe it might be difficult for the RBA to be more ‘hawkish’ than what is already factored in particularly if the Federal Budget shows ‘fiscal contraction’. Added to that, we don’t feel the looming slowdown in activity has been accounted for, neither have the challenges set to be faced by the global/Asian economy from the Middle East conflict. With positioning (as measured by CFTC futures) ‘net long’, a lot of positives priced in (the AUD is tracking ~2-3% above our ‘fair value’ estimate), and its elevated starting point following its strong run, further upside potential for the AUD might be limited, in our opinion.
