• US data. Positive US jobless claims & retail sales data has further reduced recession fears. US equities jumped up, as did bond yields. USD firmer.
• AUD outperformance. Another solid Australian jobs report helped the AUD hold its ground against the USD & strengthen on the crosses.
• RBA speakers. Gov. Bullock & others testify to Parliament. Domestic conditions still suggest the RBA is on a slightly different path to its peers.
A positive jolt across risk markets with a few more US data points reducing fears a recession is imminent. Initial jobless claims (the gauge of how many people are filing for unemployment benefits) fell to a multi-week low, further supporting views the recent uptick in US unemployment that unnerved traders was in part driven by Hurricane Beryl. On top of that US retail sales were better than anticipated. Headline retail sales rose 1% in July on the back of a jump up in auto sales, while the ‘control group’ (which feeds directly into US GDP) increased 0.3%. This was slower than last month however as our chart shows the underlying quarterly pulse is stronger than Q1, suggesting activity has picked up given household spending accounts for ¾’s of US GDP.
In response equities are a sea of green with the tech-focused NASDAQ (+2.3%) outperforming the S&P500 (+1.6%) and major European indices (EuroStoxx50 +1.7%). Industrial metals like copper (+2.4%) and oil (WTI crude +1.4%) also had a positive 24hrs with the US data overriding sluggish China data stemming from the prolonged downturn in housing and spillovers into broader demand. Elsewhere, expectations of outsized US Fed rate cuts were trimmed with ~32bps of easing now factored in for the September meeting. This had been up at ~50bps during last Monday’s panic equity sell-off. The adjustment flowed through to bonds with the US 2yr yield spiking ~14bps higher (now ~4.09%) and the 10yr rate up ~8bps (now 3.91%). In FX, the lift in US bond yields gave the USD a helping hand. EUR (now ~$1.0970) slipped back, while USD/JPY touched a two-week high (now ~149.30). GBP held its ground (now ~$1.2855) thanks to a solid Q2 UK GDP report. And while the NZD dipped back under ~$0.60 as the dovish RBNZ interest rate outlook continues to be discounted, the AUD edged up (now ~$0.6610) and outperformed on the crosses following yesterday’s positive Australian jobs figures and upbeat risk sentiment.
It’s a quiet end to the week in terms of scheduled events. Senior RBA members are testifying to Parliament (from 9:30am AEST), RBNZ Governor Orr speaks (10:30am AEST), UK retail sales are due (4pm AEST), as are US housing starts/building permits (10:30pm AEST). Consolidation in markets is likely, however we do think the USD has scope to drift a little higher over the period ahead against lower beta currencies such as EUR, GBP, and JPY, as well as the NZD given we believe markets are still pricing in too much easing by the US Fed at its mid-September meeting. Barring a deterioration in economic and labour market conditions a 25bp move is likely, in our opinion.
AUD Corner
The AUD has been whipped around over the past 24hrs by domestic and offshore data. That said, on net, it has risen, even against the firmer USD, with upbeat risk sentiment on the back of reduced US recession fears and another solid Australian jobs report supportive (see above). At ~$0.6610 the AUD is hovering above its 100-day moving average with the backdrop helping the AUD outperform on the crosses. AUD/JPY has powered ahead (+1.6%) to be at ~98.70 (a two-week high). The AUD also recorded gains of ~0.3-0.6% against EUR, CAD, and CNH, with broadening macro divergence between Australia and NZ also pushing up AUD/NZD (now ~1.1045).
Locally, the July jobs report showed that underlying economic conditions are still on positive footing. Indicative of an economy that is still operating at a high level of activity, particularly across the labour-intensive services sectors, jobs continue to be created. Employment rose by an above average ~58,200 in the month, led by full-time jobs. Employment growth is now running at 3.2%pa. At the same time, labour supply is increasing with the participation rate hitting 67.1% (a new record high). This is a technical reason why unemployment nudged up (from 4.1% to 4.2%). This is the type of result the RBA is trying to engineer. As our chart shows, the underlying dynamics are different from past downturns with the faster pace of growth in the labour force rather than a slump in employment generating the current gentle upswing in unemployment.
From our perspective, the still above trend employment, coupled with other factors like sticky domestic/services inflation, and income support from the stage 3 tax cuts points to the RBA continuing to talk tough about the risk of another rate hike over the near-term. This is likely to be the message from RBA Governor Bullock and other senior officials when they testify to Parliament today (from 9:30am AEST).
While we don’t think the RBA will raise rates again, we remain of the opinion that it will lag its peers in terms of when it starts and how far it goes during the next easing cycle. Over time we believe the contrasting monetary policy impulses between the RBA and others, and shift in relative yield spreads in Australia’s favour should be AUD supportive, particularly on crosses like AUD/NZD, AUD/EUR, AUD/CAD, and AUD/GBP where their respective central banks have started to lower rates.
