Market Briefing: All eyes on the US Fed
Have a look at the latest edition of our Event Radar & Views In A Nutshell pack.
Mixed markets. US equities consolidated while yields dipped & USD weakened. EUR at multi-year high. AUD at levels last traded in November.
US Fed. Tomorrow's Fed decision in the spotlight. After being on hold since December the US Fed is expected to cut rates by 25bps.
Signals matter. Fed's guidance in focus. More cuts anticipated over coming months. But Fed may struggle to be more 'dovish' than what is baked in.
Global Trends
A mixed performance across markets over the past 24hrs with participants focused on tomorrow’s US Fed meeting (4am AEST) and Chair Powell’s press conference (from 4:30am AEST). While there was a dip in European equities (EuroStoxx600 -1.1%) US indices consolidated with the S&P500 near record highs. US bond yields eased a bit with the 2yr rate shedding 3bps to be hovering towards the lower end of its multi-quarter range (now ~3.50%). In FX, the USD lost ground with the anticipated monetary policy divergence between the European Central Bank and US Fed pushing EUR to levels last traded four years ago (now ~$1.1867). The interest rate sensitive USD/JPY weakened (now ~146.44, close to its 3-year average), while GBP edged up (now ~$1.3646) with the latest UK labour jobs data showing conditions are cooling gradually. Closer to home, NZD ticked up (now ~$0.5988), as did the AUD (now ~$0.6684, the top of its ~10-month range).
Data wise, markets largely ignored the better than anticipated US retail sales figures. US retail sales rose 0.6% in August with gains broad-based across the sub-categories. Notably, the ‘control group’, which feeds directly into US GDP, increased 0.7%. Mechanically, this means stronger consumption growth so far in Q3, a positive for the US given household spending accounts for ~3/4’s of GDP. We think US Fed officials should take the firmer retail sales pulse as a sign the economy continues to expand, albeit at a slower pace than observed the past few years, and that it is not falling into recession.
That said, the stepdown in overall momentum and downside risks in the labour market still point to the US Fed cutting interest rates over the period ahead. We think the Fed will re-start its easing cycle tomorrow (4am AEST) after being on hold since December with a 25bp step broadly anticipated by economists and traders (interest rate markets are factoring in a ~105% chance the Fed delivers a 25bp rate cut). A larger 50bp reduction isn’t completely out of the question, but while a few members of the FOMC appear set to vote for more aggressive action we believe the most likely outcome is for the majority to push for a standard-sized cut. Attention will also be on the Fed’s updated guidance and refreshed forecasts. On net, we feel the Fed may lower its interest rate projections down towards market pricing, implying more rate cuts are in the pipeline than previously predicted. However, outcomes compared to expectations drive markets, and with a quite ‘dovish’ Fed outlook already baked in there is a risk this type of result sees the beaten down USD rebound a little in the short-term. But we don’t see these types of knee-jerk moves (if they occur) lasting too long or extending too far. Over the longer-run, the prospect of slower US growth and downshift in US interest rates should see the USD trend lower, in our view.
Global event radar: BoC (Tonight), US Fed (Thurs morning), BoE (Thurs), BoJ (Fri), Global PMIs (23rd Sep), US PCE (26th Sep), China PMI (30th Sep), RBA (30th Sep), EZ CPI (1st Oct), US Jobs (3rd Oct)
Trans-Tasman Zone
The weaker USD on the back of the dip in US bond yields ahead of tomorrow’s Fed decision (4am AEST) and a stronger EUR (the major USD alternative) has helped the NZD and AUD extend their respective upswings (see above). The NZD (now ~$0.5988) is tracking close to its 2-year average while the AUD (now ~$0.6684) is near levels traded last November. That said, in a sign of how USD-driven the moves have been over the past 24hrs the AUD has given back ground on most of the major cross-rates. The jump up in the EUR has exerted downward pressure on AUD/EUR which has dipped to its 100-day moving average (~0.5630). AUD/JPY (now ~97.88) also declined, though this comes after a strong run. AUD/JPY remains north of its 1-year average. AUD/NZD consolidated (now ~1.1162) around the top of its cyclical range with underlying economic and interest rate trends still in Australia’s favour.
Near-term, the outcome of the US Fed meeting (Thurs 4am AEST) and press conference (from 4:30am AEST) will drive markets. As mentioned above, we believe a 25bp cut by the US Fed is the most likely result with the committee also set to indicate more interest rate reductions are anticipated down the track in order to support the weakening US jobs market. But with markets already factoring this in we feel there is a risk the beleaguered USD rebounds a little as the Fed struggles to be more ‘dovish’ than what is priced. Indeed, following its recent upswing we would also note the AUD has reached ‘overbought’ levels on technical indicators such as relative strength indices.
However, we don’t think tactical rebounds in the USD/pull-backs in the AUD should be overly big or last too long. Over the medium term (i.e. next ~3-12 months) we believe the AUD can continue to grind higher. In our view the AUD should be underpinned by a combination of a weaker USD as the US Fed steadily lowers interest rates, signs of improvement in China’s economy as its stimulus push helps counteract tariff headwinds, firmer momentum in Australia’s economy, and ongoing cautious approach from the RBA. When speaking yesterday Assistant Governor Hunter stated the RBA is “pretty close” to achieving its inflation and jobs targets with the economy near full employment and households largely past the worst of the cost-of-living squeeze. In our opinion, this points to the RBA delivering only a bit more interest rate relief over the period ahead.
AUD & NZD event radar: BoC (Tonight), US Fed (Thurs morning), NZ GDP (Thurs), AU Jobs (Thurs), BoE (Thurs), BoJ (Fri), Global PMIs (23rd Sep), AU CPI (24th Sep), US PCE (26th Sep), China PMI (30th Sep), RBA (30th Sep), EZ CPI (1st Oct), US Jobs (3rd Oct)
AUD levels to watch (support / resistance): 0.6580, 0.6630 / 0.6710, 0.6750
NZD levels to watch (support / resistance): 0.5860, 0.5920 / 0.6010, 0.6050
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events)
WEDNESDAY (17th September) JPY Trade Balance (Aug) (9:50am) AUD RBA’s Jones Speaks (11:30am) GBP CPI Inflation (Aug) (4pm) EUR ECB Pres. Lagarde Speaks (5:30pm) EUR ECB’s Muller Speaks (5:45pm) EUR ECB Wage Tracker (6pm) EUR ECB's Cipollone Speaks (6pm) USD Housing Starts/Building Permits (Aug) (10:30pm) CAD BoC Decision (11:45pm)
THURSDAY (18th September) EUR ECB’s Nagel Speaks (3am) USD Fed Decision (4am) USD Fed Chair Powell Speaks (4:30am) NZD GDP (Q2) (8:45am) AUD Jobs Report (Aug) (11:30am) EUR ECB Pres. Lagarde Speaks (5:10pm) EUR ECB’s Guindos Speaks (6pm) EUR ECB’s Schnabel Speaks (7:45pm) GBP BoE Decision (9pm) USD Initial Jobless Claims (10:30pm) USD Philly Fed Survey (Sep) (10:30pm)
FRIDAY (19th September) EUR ECB’s Nagel Speaks (12am) JPY BoJ Decision (no set time) NZD Trade Balance (Aug) (8:45am) JPY CPI Inflation (Aug) (9:30am) GBP Retail Sales (Aug) (4pm) JPY BoJ Governor Ueda Speaks (4:30pm) CAD Retail Sales (July) (10:30pm)
SATURDAY (20th September) USD Leading Index (Aug) (12am)
*Note, all times/dates provided are AEST
About the author
