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• Market turbulence. Stronger US wage data pushed up US yields & dampened the risk sentiment. The stronger USD has seen the AUD fall back.
Regional data. Sluggish China PMIs & downside surprise in AU retail sales also weighed on the AUD. Some heat has come out of RBA rate hike bets.
• Fed focus. US Fed decision/press conference the next major events. A ‘hawkish hold’ looks likely, but rate expectations already look to have moved that way.

A bout of turbulence overnight with stronger than expected US wages and negative signals from business and consumer surveys dampening the mood. The US Employment Cost Index rose 1.2% in Q1, above even the highest consensus forecast. The ECI is closely monitored by the US Fed, and the strength in wages across several sectors raises further concerns the inflation slowdown is stalling. As our chart shows, leading indicators such as a declining ‘quit rate’ which illustrates less jobs churn, are still pointing to a deceleration in US wages and in turn services inflation down the track. It just looks like it could take longer than thought. Activity wise, the Chicago PMI and consumer sentiment tumbled to levels last seen in 2022. The drop in consumer expectations about the future due to elevated inflation and a cooling labour market may crimp spending, the engine room of the US economy, over coming months.

Signs of sticky inflation and slowing growth saw bond yields rise. US yields increased 6-7bps across the curve with the benchmark 10yr rate up at 4.68%. There were similar moves in Europe, with slightly higher than predicted Eurozone core inflation (2.7%pa) and a larger rebound in growth (Eurozone GDP grew 0.3% in Q1) also at play. The lift in yields saw equities slip back with the US underperforming. The S&P500’s 1.6% decline unwound a lot of its recent positive run. In the end the S&P500 fell 4.2% in April, its worst monthly performance since last September. Industrial metals also lost ground with copper (-2.9%) and iron ore (-1.8%) falling over the past 24hrs. The US macro news compounded yesterday’s sluggish China PMIs which suggested activity softened in April.

In FX, the backdrop supported the USD, with the USD index edging up towards its April highs. EUR (now $1.0670) dipped to a 1-week low, GBP (now $1.2490) is back where it started the week, USD/JPY ticked up to be just under ~158, and USD/SGD (now 1.3650) is at the upper end of its recent range. Cyclical currencies underperformed with the NZD (now ~$0.5890) and AUD (now ~$0.6475) shedding ~1.4% compared to where they were this time yesterday.

It is a busy US calendar tonight with ADP employment (10:15pm AEST), JOLTS job openings (12am AEST), and manufacturing ISM (12am AEST) due, though the main events will be the FOMC decision (4am AEST) and Chair Powell’s press conference (4:30am AEST). A new set of projections won’t be provided. Focus will be on the Fed’s updated guidance. A ‘hawkish hold’ appears to be consensus assumption with Powell likely to note rate cuts aren’t on the table near-term given inflation impulses. The key will be whether he keeps the door open to policy easing later this year. If he does, based on the already well priced ‘higher for longer’ rates view (just over 3 cuts are now factored in by end-2025 compared to the Fed’s last assessment 6 might eventuate), we think the lofty USD may lose ground.

AUD Corner

The renewed gyrations in risk markets and lift in US bond yields on the back of the US wage data (see above) has weighed on the AUD. The overnight economic news compounded yesterday’s subdued China PMIs and downside surprise in Australian retail sales (-0.4% in March vs mkt +0.2%). The weakness in retail spending has taken the heat out of RBA rate hike bets. Markets are now discounting a ~47% chance of another RBA rate rise by September (almost a full rate rise by this time had been factored in early in the week). At ~$0.6475 the AUD is at a ~1-week low, with around ½ of its rally from its Israel/Iran risk aversion lows given back.

The AUD has also weakened on most of the major crosses. AUD/EUR (-0.9%) is down near its 100-day moving average (~0.6072). AUD/GBP is hovering just below its 200-day moving average (~0.5197), and AUD/JPY is a touch over ~102. As outlined, we think Japanese authorities stepped into markets earlier this week and intervened to prop up the weak JPY. While intervention doesn’t typically alter a currencies underlying trend, we believe more intermittent steps by the Japanese can create greater two-way risk in the JPY crosses, and help pairs like AUD/JPY converge lower towards where fundamental drivers like longer-term interest rate expectations are suggesting they should be (for more see Market Musings: USD/JPY & AUD/JPY: A line in the sand?).

AUD/NZD has been an exception to the overnight AUD weakness, with the cross-rate extending its upswing this morning after the Q1 NZ labour market report showed conditions deteriorated. At ~1.1010 AUD/NZD is around its highest level since June 2023. Employment contracted in the quarter, and this saw the NZ unemployment rate rise a little more than predicted (from 4% to 4.3% a high since mid-2021). The weak NZ data should reinforce expectations the RBNZ may start to move earlier and be more aggressive in the next easing cycle than the RBA, and we believe this should continue to support AUD/NZD.

As mentioned, focus tonight will be on the US with the Fed decision (4am AEST) and Chair Powell’s press conference (4:30am AEST) center stage. With no new forecasts provided attention will be on the Fed’s updated guidance, especially given recent positive US inflation surprises. Outcomes compared to expectations are what matter for markets. And while we think the US Fed is likely to deliver a more ‘hawkish’ ‘higher for longer’ message, this may already be baked into US interest rate expectations and the USD. As our chart shows, US rate expectations have repriced higher since the turn of the year and last Fed meeting, with the markets views well above the Fed’s (now outdated) projections. If the Fed fails to exceed the markets ‘hawkish’ leanings by keeping the door open to some policy easing later this year, the USD could fall back and see the AUD rebound.

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