Market Briefing: Calm before the US data storm
Positive risk sentiment. Ahead of tonight's US CPI equity markets have bounced and the USD has given back some of its recent gains.
Binary reaction? Based on how sensitive markets have become to US inflation we think volatility could be quite high over the next 24-48 hours.
AUD rebound. AUD is back near the middle of its 1-month range. A stronger than expected US CPI could pull AUD back down.
Calm before the US data storm, with risk sentiment positive overnight ahead of the US CPI report (tonight 12:30am AEDT) and the January reading of US retail sales (Thursday 12:30am AEDT). With no major economic releases or events market participants have seemingly been adjusting their positions ahead of the US event risk.
US and European equity markets rose, with the major indices up ~0.5-1.3%, bond yields have consolidated near recent highs (the US 10-year yield is up at 3.72%, the top end of its 1-month range), and the USD has given back some of its recent gains against the EUR, GBP, NZD and AUD. USD/JPY has been an exception, with the pair rising up towards its February highs (132.91) as the lift in equity markets and expectations Kazuo Ueda (the reported front-runner to be nominated as the next BoJ Governor) could maintain an accommodative policy stance weighed on the JPY.
All market eyes will be on the US CPI report and retail sales data over the next few days. Based on how sensitive markets have become to inflation news and the pulse of the US economy we think volatility could be quite high over the next 24-48 hours. In our view the reaction to the CPI data looks set to be binary (i.e. softer inflation supports risk sentiment as interest rate expectations are trimmed back and the USD weakens (or vice versa)), though we also think it is unlikely to be symmetrical with a larger reaction in US interest rates, risk markets, and the USD occurring if the inflation and retail sales data exceed expectations. This is where we think the risks reside. While base-effects (as last year’s Ukraine war induced price spike start to roll out of calculations) point to the annual US inflation slowing a bit, the monthly data may show inflation is still quite strong, a sign it may not be as easy as people think for inflation to get back down to the Fed’s 2%pa target and that high interest rates could be needed for some time. Indeed, annual benchmark revisions to the US CPI released last week indicate that underlying momentum over late-2022 was stronger than first thought.
Global event radar: US CPI (tonight), US retail sales (16th Feb), Eurozone PMIs (21st Feb), FOMC meeting minutes (23rd Feb).
AUD bounced back overnight, with the lift in equities and softer USD the main drivers. At 0.6964 the AUD is near the mid-point of its 1-month range. Locally, February consumer confidence (10:30am) and January business conditions/confidence (11:30am) are released today. The data will be looked over for indications of how households and businesses are reacting to the jump up in interest rates, the cost-of-living squeeze, and evolving backdrop. At the margin, signs the RBA’s actions are gaining traction in areas like consumer sentiment, hiring intentions, forward orders and prices may dampen some of the aggressive rate hike expectations that are being factored in, and generate a bit of intra-day AUD volatility. The market is now discounting an RBA cash rate peak of ~4.15% by August. RBA Governor Lowe is due to appear before the Senate Economics Committee tomorrow.
While there are a number of local events on the macro radar, we continue to think that the upcoming US CPI (12:30am) and retail sales (Thursday 12:30am) should overshadow them over the next few days. As discussed above, in our opinion, the risks appear tilted to the US data showing that underlying inflation is ‘stickier’ due to strong wage growth/high services inflation, that the decline down to the Fed’s 2%pa target could be harder than markets are assuming, and that retail spending bounced back stronger than anticipated at the start of 2023. In our judgement, this type of mix could reinforce the uplift in US interest rate expectations, weigh on risk sentiment, support the USD, and push the AUD back down. As our chart shows, the AUD’s moves remain heavily contingent on broader risk appetite, with its correlation to US equities higher than average over recent months.
AUD event radar: US CPI data (tonight), RBA Gov. Lowe speaks (tomorrow), US retail sales (16th Feb), AU jobs data (16th Feb), RBA Gov. Lowe speaks (17th Feb), AU wages (22nd Feb), RBNZ meeting (22nd Feb), AU retail sales (28th Feb).
AUD levels to watch (support / resistance): 0.6806, 0.6875 / 0.7050, 0.7172
USD/SGD drifted back overnight after touching a 1-month high (~1.3331). The modest pull-back in the USD as markets pared back positions ahead of the upcoming US event risks was a catalyst. US CPI is released tonight, with US retail sales due tomorrow night.
We expect volatility around the US releases to be high, and while we believe market reaction could be binary (i.e. lower than predicted data weighing on the USD (and vice versa)), we also continue to think that relatively larger moves are more likely from positive US inflation and retail sales surprises. This is where we think the risks reside. Higher than anticipated US inflation combined with stronger retail sales should support the view that the Fed’s work still isn’t done, that US interest rates have further to rise, and that US policy settings may need to stay 'restrictive' for some time. Higher US rate expectations, and volatility in risk markets should be USD (and USD/SGD) supportive, in our view.
On the local data front, there was a downward revision to Q4 Singapore GDP, with the economy now said to have grown by just 0.1%qoq. This is down from the original estimate of 0.2%, and well below the 0.8% pace in Q3. Headwinds remain for the open/trade-exposed Singapore economy. China has reopened, which has helped offset some of the acute downside views about global growth in 2023, but the pace of global activity and trade should still be well below average. The policy tightening unleashed by the global central banks over the past year should generate a meaningful slowdown in consumer spending, global trade, and production over coming months. In time this can generate headwinds for growth-sensitive currencies like Asian FX.
SGD event radar: US CPI (tonight), US retail sales (16th Feb), Eurozone PMIs (21st Feb), FOMC meeting minutes (23rd Feb), Singapore CPI (23rd Feb).
SGD levels to watch (support / resistance): 1.3050, 1.3110 / 1.3348, 1.3445
Currency Strategist - APAC
TUESDAY (14th February)
AUD Consumer Confidence (Feb) (10:30am)
JPY GDP (Q4) (10:50am)
AUD Business Conditions/Confidence (Jan) (11:30am)
JPY Bank of Japan Governor Nominee’s Presented to Parliament (1pm)
NZD 2-Year Ahead Inflation Expectations (Q1) (1pm)
GBP Employment Report (Dec) (6pm)
EUR Eurozone GDP (Q4) (9pm)
USD NFIB Small Business Optimism (Jan) (10pm)
WEDNESDAY (15th February)
USD CPI Inflation (Jan) (12:30am)
USD Fed’s Logan Speaks (3am)
USD Fed’s Harker Speaks (3:30am)
USD Fed’s Williams Speaks (6:05am)
AUD RBA Governor Lowe Speaks (12pm)
GBP CPI (Jan) (6pm)
EUR Industrial Production (Dec) (9pm)
THURSDAY (16th February)
USD Retail Sales (Jan) (12:30am)
USD Industrial Production (Jan) (1:15am)
AUD Employment Report (Jan) (11:30am)
FRIDAY (17th February)
USD Housing Starts/Building Permits (Jan) (12:30am)
USD Jobless Claims (12:30am)
USD Philly Fed Business Outlook (Feb) (12:30am)
EUR ECB’s Panetta Speaks (12am)
EUR ECB’s Lane Speaks (2am)
GBP BoE’s Pill Speaks (4am)
USD Fed’s Bullard Speaks (5:30am)
AUD RBA Governor Lowe Speaks (9:30am)
USD Fed’s Mester Speaks (10:15am)
GBP Retail Sales (Jan) (6pm)
EUR ECB’s Villeroy Speaks (10:30pm)
SATURDAY (18th February)
USD Fed’s Barkin Speaks (12:30am)
*Note, all times/dates provided are AEDT