Market Briefing: China's stimulus push
China stimulus. Expectations of more support in China has been a positive jolt for risk sentiment. Equities & base metals rose. AUD stronger.
AU jobs. Vacancies declined last quarter, but they remain above pre-COVID levels. Overall conditions point to the RBA holding steady for a while.
US inflation. US PCE deflator released tonight. More signs of cooling inflation pressures could keep the USD on the backfoot.
The wobbles in risk sentiment didn’t last with cyclical assets rebounding over the past 24hrs. Policy developments in China continue to be a driver. Following on from the various monetary and housing measures unveiled earlier this week expectations of even more support being announced ramped up following comments by policymakers at the Politburo’s quarterly meeting of economic affairs. In addition to calls for “forceful” rate cuts authorities in China stressed the need to “maintain necessary fiscal expenditure” and pledged greater efforts to stop the declines in housing and promote a recovery. The shift may not solve all of China’s structural issues such as poor demographics and high debt burdens, however they do look to mark a turn in the policy stance. Given outcomes compared to expectations are what matter, a reduction in the near-term downside macro risks is a positive change.
Forward-looking markets agree with China’s CSI 300 equity index rising another 4%, taking its weekly gains to nearly 11%. This spilled over into other regions with European (EuroStoxx50 +2.4%) and US (S&P500 +0.4%) equities stronger. Industrial metals rose with copper up ~3.5% and iron ore jumping ~5% to be back at US$100/tonne. Bond yields ticked up with the US 2yr rate ~7bps higher (now ~3.63%). The benchmark US 10yr rate nudged up to 3.8%. Upward revisions to US GDP (the US economy is now said to have grown by 2.9% in 2023, up from 2.5% previously estimated), as well as positive surprises in US durable goods orders (a proxy for business CAPEX) and weekly jobless claims (a measure of how many people are filing for unemployment benefits) also supported risk appetite.
In FX, the USD lost ground, with EUR (now ~$1.1175) and GBP (now ~$1.3412) edging up. USD/SGD (now ~1.2840) remains near the bottom of its ~10-year range, while USD/CNH has dropped below ~7 for the first time since May 2023. The backdrop has helped cyclical currencies like the NZD (now ~$0.6327) and AUD (now ~$0.6895) outperform. This isn’t surprising. As our chart shows, over the past year the AUD has had a higher than average positive correlation with trends in emerging market and global equities, as well as bond yield differentials and the copper price.
Today, in addition to ongoing reaction to China developments markets will also be focused on the US PCE deflator (the US Fed’s preferred inflation gauge) (10:30pm AEST). In our view, more signs US inflation pressures are cooling should solidify expectations for a steady stream of US interest rate cuts over the next year, which in turn may keep the USD on the backfoot.
Global event radar: US PCE Deflator (Tonight), China PMIs (30th Sep), Japan Tankan (1st Oct), Eurozone CPI (1st Oct), US ISM (2nd Oct), US Jobs (4th Oct)
AUD corner
The AUD has snapped back over the past 24hrs. Expectations of more forceful policy support measures in China has given regional and global equities a boost, as well as underpinned base metal prices and Asian currencies, and exerted downward pressure on the USD (see above). At ~$0.6895 the AUD is back near the top of the range it has occupied since Q1 2023. The backdrop has also helped the AUD outperform on the crosses. AUD/EUR (now ~0.6170) is up around its ~2-month highs, AUD/JPY (+1.1%) is approaching its 200-day moving average (~100.03), AUD/NZD is hovering near ~1.09, AUD/CAD (now ~0.9285) is at the upper end of its ~18-month range, and AUD/CNH (now ~4.8082) is tracking north of its ~1-year average.
Locally, the quarterly job vacancy data showed that while labour demand is continuing to cool, conditions are still quite tight from a historical perspective. Job vacancies, a measure of labour demand, fell ~5.2% in the past quarter, yet while they are well below their COVID-era peak, vacancies are still ~70% above their pre-COVID average. As our chart shows, the ratio of unemployed persons to vacancies is still at levels indicative of overall labour conditions still above ‘full employment’. This type of backdrop might continue to keep domestic core/services inflation elevated for a while, and in turn supports our long-held view that the RBA is on a different path to its peers. We believe the resilient Australian labour market, core inflation trends, fiscal/income support that is flowing to households, and lower interest rate starting point means the start of a measured and modest RBA rate cutting cycle remains a story for H1 2025.
The ongoing adjustment in interest rate differentials in Australia’s favour, coupled with upbeat risk sentiment stemming from China’s policy push and its positive impacts on emerging market equities and base metal prices should be AUD supportive not just against the USD but also against currencies like the EUR, CAD, NZD, and GBP over the medium-term, in our view.
AUD event radar: US PCE Deflator (Tonight), China PMIs (30th Sep), Japan Tankan (1st Oct), Eurozone CPI (1st Oct), US ISM (2nd Oct), US Jobs (4th Oct)
AUD levels to watch (support / resistance): 0.6770, 0.6830 / 0.6910, 0.6960
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
FRIDAY (27th September)
JPY Tokyo CPI Inflation (Sep) (9:30am)
EUR France CPI Inflation (Sep P) (4:45pm)
EUR Spain CPI Inflation (Sep P) (5pm)
EUR ECB’s Rehn Speaks (5:15pm)
EUR ECB’s Lane Speaks (6:15pm)
EUR Confidence Gauges (Sep) (7pm)
EUR ECB’s Cipollone Speaks (7:40pm)
EUR ECB’s Nagel Speaks (9:15pm)
CAD GDP – Monthly (July) (10:30pm)
USD PCE Deflator (Aug) (10:30pm)
USD Trade Balance (Aug) (10:30pm)
USD Fed’s Collins & Kugler Speak (11:30pm)
SATURDAY (28th September)
USD Fed’s Bowman Speaks (3:15am)
*Note, all times/dates provided are AEST
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