• Quiet markets. Limited market moves overnight. US equities tread water, oil a bit higher, bond yields consolidate, & USD softer. AUD & NZD tick up.
• Macro news. Latest US CPI data out tonight. Will it boost or lessen the odds of a late-October US Fed rate hike? Australian jobs report out tomorrow.
Global Trends
Market movements have been well contained over the past few days with the US holiday at the start of the week compounded by limited news flow overnight. US equities consolidated with the S&P500 treading water not that far from its record highs. Oil prices ticked up with brent crude tracking above US$106/brl (~31% above its 5-year average). Hostilities in the Middle East are ongoing. Supply concerns remain with reports indicating there has been an increase in attacks on ships crossing the Strait of Hormuz. Elsewhere, bond yields held up at high levels with the benchmark US 10yr rate (now ~5.21%) hovering around the top of its multi-year range. In FX, the USD index lost a bit of ground with EUR (now ~$1.1197) nudging up and USD/JPY (now ~158.35) dipping. Cyclical currencies like the NZD (now ~$0.5609) and AUD (now ~$0.6983) edged a little higher during quiet trade.
Macro wise the IMF released its latest World Economic Outlook. The forecast for world GDP growth for 2026 was unchanged at a subpar 3.1%. However, momentum is predicted to improve next year with growth forecasted to accelerate to 3.4%. But under the surface it is still a story of the haves and have nots with global activity expected to remain uneven with nations plugged into the AI CAPEX boom performing more strongly. At the same time, forecasts for world inflation in 2026 and 2027 were also revised up. The undercurrents point to further policy tightening by the major central banks over the next year, in our view. However, the question is which central banks might under or overdeliver compared to what is already priced in? With this in mind, comments by influential US Fed member Williams are worth highlighting. In his judgement, “it may be appropriate to have one more rate hike (this year)… (but) don’t think at this time … we would need to do anymore” after that given signs US inflation could slow “quite a bit”.
Time will tell. The September reading of US CPI inflation is in the spotlight tonight (11:30pm AEDT). Consensus is looking for US core inflation to rise 0.2% in the month, which we believe should be low enough to keep the Fed on the sidelines at the late-October meeting. Markets are factoring in a ~25% chance of another Fed rate increase this month, with a hike fully factored in by year-end. A downward adjustment in near-term US rate expectations may see the USD soften, in our opinion, particularly as positioning (as measured by CFTC futures) is ‘net long’ indicating that a lot of positives look to be baked in.
Trans-Tasman Zone
No new news has been somewhat good news for cyclical currencies like the NZD and AUD overnight with both ticking up on the back of a softer USD (see above). That said, at ~$0.5609 the NZD is close to the bottom end of the wide range it has occupied since last November. But in our view, the NZD’s recent weakness looks overdone with it tracking ~3-4 cents below our ‘fair value’ model estimate. Too much weight is arguably being given to NZ’s status as a ‘net energy importer’ and the shift in the polling for the upcoming NZ General Election. We believe macro supports such as sturdy/improving NZ growth momentum, elevated agricultural prices, and outlook for a steady stream of further RBNZ rate hikes could see the NZD grind back up over the medium-term.
The AUD (now ~$0.6983) has also edged up a bit so far this month after a rather difficult September. The minutes of the last RBA meeting, when a 25bp rate hike was delivered, were released yesterday. The commentary gave off ‘hawkish vibes’, in our opinion. According to the minutes recent CPI data was “more reflective of greater domestic capacity constraints than pass-through of costs related to the Middle East conflict”, and various forces “could continue to place upward pressure on inflation”. As such the Board remains willing to raise interest rates “further if required”.
The September Australian jobs data is out on Thursday, while the detailed quarterly CPI inflation report is due later this month (28 October). We believe the incoming data could show the labour market is holding up and/or inflation remains uncomfortably high and well north of the RBA’s target. If realised, this could see markets factor in a greater chance of another RBA rate rise by year-end. Markets are now only assigning a ~30% chance of a RBA hike on 3 November, and less than a 50% probability it occurs at the 8 December meeting. We think an upward adjustment in near-term RBA interest rate expectations may give the AUD a little boost over the period ahead. Particularly as positioning metrics indicate participants are quite ‘bearish’/’net short’ the AUD, and based on our thinking the USD might also drift lower (see above). We would also note that November-December has historically tended to be a more ‘seasonally’ positive time of the year for the AUD.
