• Consolidation. Modest burst of vol. following a benign US CPI report. US equities ticked up. Oil dipped. AUD range bound. NZD underperformed.
• US Fed. Softer US inflation & cracks in the jobs market ease the pressure for the US Fed to hike. US producer prices due tonight & retail sales out on Friday.
Global Trends
There was a modest burst of intra-session volatility overnight, induced by a benign and as predicted US CPI inflation report, but the net swings across markets were rather muted. US equities ticked up slightly (S&P500 +0.3%), however this comes after a couple of softer sessions. Bond yields consolidated with the US 10yr rate hovering around ~4.69%, near the upper end of its 1-year range. Oil prices shed ~1% with brent crude edging down towards ~US$88.50/brl. In FX, after initially dipping a little post the US data, the USD index rebounded, although the reversal was quite constrained with EUR ~0.2% lower compared to where it was this time yesterday (now ~$1.1525) and USD/JPY ~0.1% higher (now ~159.46). Elsewhere, the AUD has been range bound (now ~$0.7061) and the NZD underperformed (now ~$0.5858) with a second failed confidence vote on NZ PM Luxon’s leadership in four months exerting downward pressure.
In terms of the US data, CPI was as per analysts forecasts. US headline inflation nudged up 0.1% in July which saw the annual run-rate moderate to 3.4%pa. Core inflation, which excludes food and energy, eased to 2.5%pa. If the months that were artificially lowered by missing data due to the US government shutdown are excluded, this is the slowest annual pace since 2021. Under the hood the data suggests various supply shocks like tariffs are fading, as is the temporary boost to tourism related inflation from the World Cup. The softening inflation pulse combined with the cracks in the US jobs market lessen the chances of near-term policy action by the US Fed, in our view. Markets agree, with odds of a September US Fed rate hike pared back to ~40% and only ~40bps of tightening by next April now factored in. This is down from ~62bps priced in a few weeks ago.
US producer price inflation is due tonight (10:30pm AEST) and retail sales figures are released later in the week (Fri night AEST). In our opinion, more signs pipeline inflation pressures are moderating and/or consumer spending has lost steam after a solid Q2 could see markets further trim their US Fed rate rise bets. If realised, we believe this may weigh on the USD.
Trans-Tasman Zone
A few modest gyrations in markets overnight in reaction to the benign US CPI inflation data and tweaks to US Fed rate hike expectations (see above). That said, at ~$0.7061 the AUD is, on net, little changed from where it was 24hrs ago, though its intra-day peak (i.e. ~$0.7091) was the highest point it has traded since early-June. The uptick in US equities did help the AUD edge up on most of the major cross-rates with gains of ~0.1-0.2% recorded against EUR, JPY, GBP, and CAD. By contrast, NZD underperformed (now ~$0.5858) and AUD/NZD rose (now ~1.2053). Another failed confidence vote on NZ PM Luxon’s leadership, and the political ructions weighed a little on the NZD.
Locally, RBA Assistant Governor Kent speaks today (10:15am AEST), while next week consumer confidence (Tues), wages (Weds), and the monthly jobs report (Thurs) are due. All in all, we think the incoming Australian data might sap some of the markets enthusiasm about another RBA rate hike. There is currently a ~60% chance assigned to the RBA raising interest rates again by December and ~18bps of tightening factored in by next May.
Over the short-term, the US data and shift in Fed expectations should remain in the AUD driver’s seat, in our opinion. With that in mind, we believe signs of a further softening in US producer prices (10:30pm AEST) and/or sluggish retail sales momentum (Fri night AEST) may see the USD lose ground and the AUD tick up a bit into the end of the week. That said, given the RBA appears closer to the end than the beginning of its tightening cycle, while other central banks have room to run, the AUD’s upside potential from here could be constrained. Moreover, we believe medium-term macro headwinds for the AUD remain. The list includes the slowdown in Australian economic growth, narrowing yield spreads, lingering issues for global/Asian growth because of disruptions to energy supply, and valuation worries across AI/tech stocks.
