• China focus. The surge in China’s equity market continued yesterday. Iron ore prices also higher. This helped the AUD add to recent gains.
• Fed Chair. US yields & the USD clawed back some ground in overnight trade after Chair Powell tempered expectations about outsized rate cuts.
• Data driven. US Fed is data driven. Interest rate expectations & USD will be sensitive to whether US data is stronger or weaker than predicted.
Mixed fortunes across markets at the start of the new week. On the one hand the upswing in China’s equity market on the back of the stimulus push to support growth continued with the CSI300 index following up last week’s nearly 16% gain with an 8.5% increase yesterday ahead of the Golden Week holiday. Iron ore prices have been going along for the ride with prices now hovering around US$107/tonne, close to 20% above last week’s low. That said, there were diverging moves in other regions with European equities losing ground (EuroStoxx600 -1%) and only modest gains recorded in the US (S&P500 +0.4%). Although the S&P500 is up at record highs.
Elsewhere, bond yields rose with the US 2yr rate ~8bps higher (now ~3.64%) and the 10yr ticking up ~3bps (now ~3.78%). Comments by US Fed Chair Powell were in focus overnight with his tone seeing markets marginally trim expectations for a follow up 50bp rate cut in November. According to Chair Powell the “the economy is in solid shape” and policymakers “intend to use our tools to keep it there” with settings expected to move to a “neutral stance over time” (i.e. interest rates falling to ~2.75-3%). However, Chair Powell also noted that the committee “isn’t in a hurry to cut rates quickly”, things aren’t on a preset course, and that the data will guide things with a sharper slowdown met with “faster” rate cuts and a more resilient economy meaning cuts are “slower”.
In FX, the paring back of aggressive Fed rate cut bets gave the beleaguered USD a little intra-day support with earlier weakness partially unwinding. On net EUR is a touch lower compared to this time yesterday (now ~$1.1135) with comments by ECB President Lagarde keeping the door to a rate reduction in mid-October wide open. By contrast, GBP is flat (now ~$1.3374) and the interest rate sensitive USD/JPY appreciated 0.9% (now ~143.60). USD/SGD (now ~1.2845) nudged up, though it remains towards the bottom end of its decade range, while NZD (now ~$0.6345) and AUD (now ~$0.6913) have also edged fractionally higher.
There are several important data points released over coming days. Tonight, Eurozone CPI is due (7pm AEST), as is US JOLTS job openings and the ISM manufacturing survey (both 12am AEST). Later this week US ADP employment (Weds night AEST), the services ISM (Thurs night AEST), and monthly non-farm payrolls report (Fri night AEST) are scheduled. As outlined by Chair Powell the US Fed is data-dependent, hence interest rate expectations and the USD will be sensitive to the incoming labour market metrics exceeding or underwhelming consensus expectations. Based on various leading indicators we think risks are tilted to the US jobs data coming in softer than anticipated, which if realised could see the USD come under downward pressure.
AUD Corner
While overnight comments by Fed Chair Powell generated a bit of an uplift in US bond yields and the USD during US trade it wasn’t enough to fully unwind the AUD’s positive start to the week (see above). On net, the AUD (now ~$0.6913) has ticked higher over the past 24hrs, extending its recent upswing with the currency tracking near the upper end of the range it has occupied since early-2023. The underlying backdrop, particularly the surge in China’s equity market and improved sentiment regarding China’s growth outlook given the push by authorities to inject more stimulus has helped the AUD outperform on the crosses. AUD/EUR (now ~0.6208) is less than 1% from its 2024 year-to-date highs, AUD/JPY (now ~99.25) is close to its 1-year average, and AUD/CAD (now ~0.9350) is near 18-month highs.
Locally, retail sales for August are due today (11:30am AEST). We believe spending related to the earlier timing of Father’s Day coupled with income support from the stage 3 tax cuts could see retail turnover improve (mkt 0.4%). Signs of life in consumer spending might reinforce thoughts that the RBA is diverging from its global counterparts with rate cuts set to kick off later and be more limited in Australia than in many other nations. In our view, the resilient Australian labour market, domestic inflation trends, and lower interest rate starting point means the start of a modest RBA rate cutting cycle is a story for H1 2025.
The adjustment in interest rate differentials in Australia’s favour, combined with upbeat risk sentiment generated by the stimulus support being rolled out in China and its positive spillovers into emerging market equities and base metal prices should be AUD supportive over the period ahead, in our opinion. Indeed, we feel a deceleration in Eurozone CPI inflation (7pm AEST), and/or more signs the US labour market is losing steam could see AUD/EUR and AUD/USD add to recent gains. Despite its sharp lift over recent weeks we think the AUD is still undervalued. The average across our suite of models indicates AUD ‘fair value’ is closer to ~$0.7050, with the bulk of the underlying drivers now in a better position than when the AUD was last trading around current levels at the start of 2023.
