• Quiet markets. US holiday overnight. European equities ticked up. USD a bit softer. AUD near the top of its multi-week range.
• Economic trends. US macro headwinds continue to build. Markets are pricing in a stream of US Fed interest rate cuts from the mid-September meeting.
• Event Radar. AU GDP due Wednesday. US ISM survey out tonight. Later in the week focus will be on the monthly US jobs report (Fri night AEST).
Global Trends
A quiet start to the new week in markets. No surprise given the US was closed for ‘Labor Day’. There was no reaction to the US Federal Appeals Court ruling that President Trump lacked legal authority to impose tariffs under the International Emergency Economic Powers Act. Tariffs remain in place as the legal process unfolds with the US Supreme Court next in line to make a ruling. In terms of the numbers the EuroStoxx600 ticked up 0.2%, inline with where futures are signaling the US S&P500 might open. European bond yields edged a bit higher (+1-3bps), as did oil prices (WTI Crude +1% to US$64.60/brl), while iron ore (-0.5%) and copper (-0.3%) slipped back a little. In FX, the USD softened modestly with EUR drifting above ~$1.17 and USD/JPY consolidating (now ~147.17). The NZD (now ~$0.5902) and AUD (now ~$0.6554) nudged up with the latter near the top of its multi-week range.
Market action could heat up over coming days with several key US data releases due that may influence US Fed interest rate expectations. Tonight, the bellwether US manufacturing ISM survey is out (12am AEST), while JOLTS job openings (Weds night AEST), ADP employment, the services ISM (both Thurs night AEST), and monthly jobs report (Fri night AEST) are also on the schedule. A couple of US Fed members are also set to speak, including NY Fed President Williams (Fri morning AEST), before the backout period ahead of the mid-September meeting kicks in.
US economic headwinds continue to build. As our chart shows, forward indicators such as the spread between new orders and inventories point to another subpar US ISM reading. In terms of the labour market, we think cracks are widening. The combination of slowing immigration and weaker hiring suggests underlying jobs growth in the US has stepped down and that the unemployment rate should trend higher over the next few months. Market consensus is looking for non-farm payrolls to come in at a sluggish 75,000 in August and for unemployment to lift to 4.3%. We believe this type of outcome and/or other signs momentum in the US economy/labour market is stalling could reinforce views looking for the US Fed to deliver a steady stream of interest rate cuts from the September meeting. This in turn may keep the USD under downward pressure, in our opinion.
Trans-Tasman Zone
A weaker USD and still rather buoyant risk sentiment (as illustrated by the elevated level of global equities) has supported the AUD, and to a lesser extent the NZD, over the past week or so (see above). At ~$0.6554 the AUD is near the upper end of the range it has occupied since late-July and ~1 cent above its 1-year average. The NZD (now ~$0.5902) has recovered lost ground to be slightly north of its 1-year average. The AUD has also perked up a bit on some of the major crosses. AUD/EUR is above its 50-day moving average (~0.5588), AUD/NZD (now ~1.1104) is around the top of its ~6-month range, AUD/JPY (now ~96.46) is grinding higher, and AUD/CNH (now ~4.6746) is above its multi-month average.
The Australian economic surprise index improved over August, implying that more data prints came in better than anticipated. We think this trend could extend over the near-term. Q2 Australian GDP is released on Wednesday. Leading indicators such as forward orders suggest activity across the private sector improved over the quarter and that the more positive momentum has continued into Q3. In our judgement, signs that Australia’s economic growth pulse is turning the corner might solidify views that the RBA may continue to deliver only a gradual and drawn-out interest rate cutting cycle.
Markets seem to agree with our assessment with the next RBA rate cut assumed to occur in November and only ~2 more reductions discounted over the next year. We believe that while some intermittent data-driven or tariff headline related bursts of AUD volatility are possible over the short-run, over the longer-term (i.e. next 3-12 months) the AUD could gain more altitude. We think the AUD may be supported by a combination of a softer USD, measured approach from the RBA, re-acceleration in Australian growth, and/or signs of improvement in China’s economy as its stimulus push helps counteract tariff headwinds across its export sector.
