• Fed repricing. Positive US services ISM & Fed rhetoric has seen markets continue to pare back rate cut bets. Rising US yields are supporting the USD.
• RBA today. The decision & new forecasts are released at 2:30pm AEDT with Gov. Bullock holding a press conference from 3:30pm AEDT.
• Push back? No policy change expected. Focus will be on the RBA’s guidance. Will it follow the BoE & US Fed by leaning against rate cut forecasts?
The upswing in bond yields and the USD has continued at the start of the new week. A positive surprise in the US ISM services index, which hit a 4-month high on the back of a pickup in new orders and hiring intentions, compounded last week’s bumper jobs report and was another sign economic momentum remains positive. The latest addition of the Fed’s Senior Loan Officer survey, a guide to credit conditions across the US economy, also showed that lending standards are tightening at a slower pace.
US Fed rate cut expectations continue to be pared back with comments yesterday by Chair Powell in a ’60 Minutes’ interview (conducted ahead of the labour market report) reiterating that policy easing in March was “unlikely” with the inflation fight “not quite done”. Minneapolis Fed President Kashkari made similar observations overnight and added that policy “might not be as tight as we think” given the equilibrium ‘neutral rate’ (the theoretical guidepost central bankers benchmark settings against) could be higher. Odds of a Fed rate cut in March have tumbled to less than 20% (this is down from over 90% in late-December) with markets now penciling in ~4.5 rate cuts in 2024 (a month ago this had been approaching ~7 cuts).
The moves have flowed through to bonds with US yields up another ~11-15bps across the curve. Yields across Europe also rose, albeit not as much. UK rates lifted ~9bps, and German yields are up ~5-8bps. The benchmark US 10yr rate is now 4.16%, near the top of its 2024 range, but as our chart shows still a long way from its October peak. US equities slipped back slightly (S&P500 -0.2%) while the USD Index added to its gains. EUR (now ~$1.0740) touched its lowest point since mid-November, GBP (now ~$1.2530) is around a 2-month low, and the interest rate sensitive USD/JPY (now ~148.70) is at multi-week highs. USD/SGD has tracked the broader USD moves to be above its 200-day moving average (~1.3466) for the first time since November. The AUD (now ~$0.6483) has fallen to levels last traded in mid-November.
US Fed speakers will continue to be in focus over coming days with another 11 appearances scattered across the rest of the week. While the relatively more cautious rhetoric and push-back on near-term rate cut assumptions is likely to continue, helping to prop up the USD over the short-term, based on the scale of the repricing that has now washed through we think further potential upside in the USD looks more limited from here. The gap between the markets interest rate views and the Fed’s central case has tightened, parallel moves in global bonds means relative yield differentials aren’t drastically moving in the US’ favour, and data released next week appears set to show US inflation is continuing to slow and retail sales moderated after a late-2023 flurry. This could see markets refocus their attention on the medium-term outlook for US interest rates to move lower.
Downward pressure on the AUD has continued early in the new week. At ~$0.6485 the AUD is at levels last traded in mid-November. As outlined above, the AUD isn’t alone here with the upturn in US bond yields stemming from the reduction in US rate cut bets supporting the USD. This continues to be illustrated by the more limited moves on the AUD crosses. AUD/EUR is treading water near ~0.6035, and although the AUD ticked up against GBP (+0.3%) it has eased modestly versus the JPY (-0.2%), NZD (-0.2%) and CNH (-0.4%) over the past 24hrs.
Today, Q4 retail sales volumes are released (11:30am AEDT), but the major local focal point is the RBA. This is the first meeting of 2024 and the first under the new structure. The decision and updated quarterly forecasts are released at 2:30pm AEDT, with Governor Bullock holding a press conference from 3:30pm AEDT. Governor Bullock will speak again at a Parliamentary Testimony on Friday.
No change in policy is anticipated, but following the step down in inflation and softness in consumer spending attention will be on the RBA’s latest projections and forward guidance. Although inflation is moving in the right direction, and we believe the RBA’s forecasts could show it back in the 2-3%pa target band around mid-2025, we also think policymakers will provide an even-handed outlook. By that we mean the RBA may not completely rule out the risk of another move if inflation surprises, but they are also likely to stress the main discussion is now on how long high interest rates might need to remain in place to be sure inflation returns to target in a timely manner. We also feel that the RBA will be reluctant to point blankly state the next rates move could be down in order not to loosen conditions and undo some of the work that has been done.
In terms of the AUD, given interest rate markets appear to have priced in a ‘dovish’ turn by the RBA (there is ~7% chance of a cut today and a ~30% probability of a move by May), much like the USD and GBP reaction to last week’s US Fed and BoE meetings, a push back on near-term policy easing calls could give the AUD some intra-day support as rate expectations adjust and with the currency looking a bit stretched. The AU-US two-year yield spread (now -69bps) is at levels implying the AUD has fallen too far. Statistically the AUD is also rather low having only traded below where it is currently less than 6% of the time since 2015. But based on the still positive USD backdrop a sustained rebound in AUD/USD may take time to development. Hence, in the near term, a still ‘cautious’ RBA may come through more durably on crosses such as AUD/EUR and AUD/NZD given the EUR’s negative seasonality at this time of the year and the Eurozone’s economic malaise, and with the Q4 NZ labour market report (Weds 8:45am AEDT) set to show conditions are loosening.
AUD levels to watch (support / resistance): 0.6400, 0.6450 / 0.6560, 0.6620