• Market swings. Modest improvement in sentiment overnight after risk aversion on Friday. Markets bring forward US rate hike pricing. AUD near 2-month low.
• US data. Better than expected US jobs report on Friday. US CPI out this week. Markets may continue to adjust their US Fed thinking. More vol. expected.
Global Trends
A few turbulent sessions across markets the past few days with a rather acute bout of risk aversion on Friday night and during yesterday’s Asian trade partially unwound overnight. Risk appetite improved a bit during last night’s US trade on the back of Middle East headlines. After a few renewed skirmishes yesterday between Iran and Israel the two sides agreed to a tentative ceasefire, though this latest flexing of military muscle is another reminder the conflict is ongoing and that the economic impacts from the disruption to energy and supply-chains could cast a long shadow over the world economy.
On top of the Middle East conflict, another key catalyst behind the market gyrations was a bring forward of US interest rate hike expectations after the latest US jobs report (released on Friday night) came in better than anticipated. Non-farm payrolls rose 172,000 in May, almost double analysts’ predictions, the prior few months were revised higher, and the unemployment rate held steady at 4.3%. Last week we warned about the chances of this happening given the pickup in US growth momentum since the turn of the year. As a result, markets are now factoring in a US Fed rate hike by December, with a high chance another might be delivered by next April also baked in. This is a long way from the multiple rate cuts that were forecast by the US Fed before the US/Iran conflict kicked off.
In terms of the numbers, after tumbling 2.6% on Friday the US S&P500 edged up a modest ~0.3% overnight. Likewise, the NASDAQ rose 0.9% after shedding ~4.2% on Friday, its biggest one-day drop since April 2025. Bond yields have moved higher with the US 10yr rate around 4.56%. On net, this has given the USD a boost the past couple of sessions with the EUR (the major USD alternative) hovering near a two-month low (now ~$1.1535), USD/JPY up around the top of its cyclical range (now ~160.15), and GBP below its one-year average (now ~$1.3340). NZD perked up a little overnight, but at ~$0.5812 it is close to the bottom end of its two-month range. It is a similar story for the AUD (now ~$0.7046).
On top of Middle East headlines/developments, central banks and US CPI inflation (Weds night AEST) are in the spotlight this week. The ECB is expected to raise rates by 25bps, its first hike of a new tightening cycle (Thurs night AEST), while the Bank of Canada looks set to hold (Weds night AEST). On the back of the jump in fuel prices and spillovers into other areas like airfares and logistics US inflation is forecast to accelerate with headline CPI potentially hitting its fast pace since April 2023 (mkt 4.2%pa). If realised, we think there is scope for markets to further bring forward when they think the US Fed may lift rates and/or how far it might go, this in turn could see the USD strengthen even more.
Trans-Tasman Zone
On the back of the swings in risk sentiment over the past few sessions, adjustment in US interest rate expectations, and moves in the USD (see above), the AUD and NZD have endured some volatility. On net, the AUD (now ~$0.7046) and NZD (now ~$0.5812) have fallen with both currencies around the bottom end of ranges traded since mid-April. Indeed, the NZD is ~3% below the peak touched at the end of May, while the AUD is ~3.2% from its early-May highs. The AUD has also given back ground on the major cross-rates. AUD/EUR (now ~0.6108) is at a multi-week low, as is AUD/JPY (now ~112.85), and AUD/GBP (now ~0.5281), while AUD/CNH (now ~4.7798) has dipped towards its one-year average.
It is a quiet week on the antipodean economic calendar. Australian consumer confidence (10:30am AEST) and business conditions (11:30am AEST) are due today. They should provide an update on the mood of households after the Federal Budget, and how businesses see the lay of the land with attention on hiring intentions, forward orders, and purchase costs given rising inflation pressures. On balance though, we think offshore events and risk sentiment should remain in the AUD and NZD drivers’ seat. As mentioned above, we believe US CPI (Weds night AEST) could show an acceleration in inflation, which in turn may generate a further upward adjustment in US interest rate expectations that supports the USD (and exerts more downward pressure on NZD and AUD).
More broadly, as outlined before, we think it might be difficult for the RBA to be more ‘hawkish’ than what is priced in (markets are factoring in ~29bps of further RBA tightening by February), at the same time views about other central banks like the US Fed are shifting and some others may begin to hike rates (such as the ECB this Thursday). This makes us think relative yield differentials might have peaked and could be starting to turn against the AUD. This, coupled with the slowdown in Australian economic growth, challenges faced by the global/Asian economy from the Middle East conflict, and slight overvaluation (the AUD is still ~1% above our ‘fair value’ estimate) suggest there are still more downside risks over the period ahead.
