• Market swings. Conflicting US/Iran reports generated volatility. US equities a bit higher. USD whipped around. Local/offshore factors push/pulled the AUD.
• AU jobs. Weak jobs report in April. Employment fell. Unemployment at multi-year high. RBA rate hike expectations trimmed. Domestic headwinds growing.
Global Trends
The ‘will they, won’t they’ situation regarding a US/Iran peace deal continues to generate bursts of market volatility. Risk sentiment, and bellwether indicators like oil prices, swung around overnight on the back of conflicting reports. One the one hand the latest 14-point framework was reported by Iranian media as having “narrowed the gap” and US Secretary of State Rubio stated there were “good signs”. On the other, Iranian Supreme Leader Khamenei stressed that near-weapons-grade uranium must not be sent abroad. As outlined previously, the longer the current state of plays drags on and the Strait of Hormuz is effectively shut, the greater the negative impact on the global economy. The mechanics of oil production mean that turning wells back on isn’t like flicking on a light switch. Indeed, the CEO of the Abu Dhabi National Oil Company said that even if the conflict ended immediately, Middle East oil flows might not fully recover until well into 2027.
On net, there was a slight ‘glass half full’ bias across optimistic markets with brent crude slipping back a bit. Although at ~US$102.50/brl brent prices are still elevated. US equities nudged up with the S&P500 eking out a ~0.2% gain, while the US 2yr bond yield eased ~3bps (now ~4.08%). In FX, the USD index whipped around intra-session but is little changed from where it was this time yesterday. EUR is tracking near ~$1.1620, USD/JPY is close to ~159, and GBP is at ~$1.3432. NZD is hovering around its 1-year average (now ~$0.5875), and after being weighed down yesterday by a weaker than anticipated Australian jobs report the AUD rebounded overnight (now ~$0.7151).
Data wise, the latest batch of global business PMIs showed the US economy is holding up with the manufacturing and services gauges in ‘expansionary’ territory. By contrast, the UK services PMI slumped, and the Eurozone equivalent remained in the ‘contractionary’ zone. The relative resilience of the US economy, and remerging price pressures has seen markets adjust expectations about the path for US interest rates with a rate hike by the US Fed priced in by January. As our chart shows, relative US-non US yield spreads are widening and in our view this can be USD supportive in the near-term.
Trans-Tasman Zone
Domestic and offshore macro/market cross-currents have whipped around the AUD, and to a lesser extent the NZD, the past 24hrs. At ~$0.5875 the NZD is hovering close to its ~1-year average. NZ Q1 retail sales data released this morning was better than predicted with volumes growing 0.9%qoq. This was almost double consensus forecasts. The growth/inflation pulse across the NZ economy suggests the RBNZ may need to begin shifting interest rates higher and out of ‘accommodative’ territory sooner rather than later. Markets are pricing in a ~80% chance a rate rise is delivered by July, with ~80bps of tightening by the RBNZ factored in by year-end. Over time, we believe this should be NZD supportive and can exert downward pressure on AUD/NZD.
In Australia, the April jobs report was released yesterday. Even after accounting for some distortions created by school holidays and an earlier Easter holiday period in 2026 the data was weak. Employment fell (-18,600, with full-time and part-time declining) and unemployment rose (from 4.3% to 4.5%, a high since late-2021). The ground is shifting across the Australian economy. Consumer and business confidence is below average, the flow through of higher interest rates to the heavily indebted household sector is a drag on activity, there is an additional hit to incomes/spending from the jump in fuel costs, and policy changes are creating uncertainty in sectors like housing.
Unemployment is running north of where the RBA was predicting it to be, and things could get worse down the track. In response, markets have pared back their bullish RBA rate hike bets with only 1 more rate rise factored in by February. By contrast, expectations other central banks might be hiking rates more aggressively over H2 2026 are continuing to grow. This makes us think relative yield differentials might have peaked and could start to gradually turn against the AUD. This, combined with the unfolding slowdown in Australian economic activity, challenges faced by the global/Asian economy from the prolonged Middle East conflict, ‘net long’ skew in positioning (as measured by CFTC futures), and lingering overvaluation (the AUD is still ~1-2% above our ‘fair value’ estimate) suggest there are more downside than upside risks over the period ahead.
