Market Briefing: Fed fallout
Have a look at the latest edition of our Event Radar & Views In A Nutshell pack.
Improved tone. Sentiment generally improved. US equities rose, while US yields & USD edged up a bit further. AUD slipped back a little more.
NZD weakness. NZD underperformed after the weak Q2 NZ GDP opened the door to a larger 50bp RBNZ rate cut in October. AUD/NZD higher.
AU jobs. Mixed signals in the volatile AU jobs report. Topline employment fell but unemployment held steady. RBA should look through the noise.
Global Trends
After the wobbles post yesterday’s US Fed decision risk appetite generally improved overnight, though there was a mixed performance across asset classes. Typically 'glass half full' equities have taken a positive view of the Fed’s guidance with the S&P500 (+0.5%), tech-focused NASDAQ (+0.9%), and small cap Russell2000 (+2.5%) all closing at record highs. US bond yields nudged up a bit further (~1-2bps across the curve), while the USD’s recovery extended a little further. A drop in weekly US jobless claims after some quirks pushed them higher last time out combined with a sizeable jump in the Philly Fed business survey generated a few positive vibes about the US economy.
Over in the UK the Bank of England held interest rates steady at 4%, though two perennial doves on the nine-person committee maintained their calls for further easing. The BoE’s guidance remained identical with the “gradual and careful” approach reiterated as wary policymakers continue to keep a close eye on UK inflation trends. Across FX, the firmer USD has exerted downward pressure on the other major currencies. EUR has dipped back below ~$1.18, GBP has eased to ~$1.3550, and ahead of today’s Bank of Japan meeting (no set time) where no policy changes are anticipated USD/JPY has edged up towards ~148. Closer to home the NZD underperformed (now ~$0.5884) with yesterday’s weak NZ Q2 GDP raising the chances the RBNZ delivers a jumbo 50bp rate cut in October and follows that up with more policy support down the track. The AUD has also lost some more ground (now ~$0.6613) after the volatile Australian labour market data showed a surprising decline in employment in August.
The recent market swings and rebound in USD have been broadly inline with our thinking as we had noted ahead of the Fed meeting that the lofty rate cut expectations factored in would be hard to exceed. That said, we remain of the view the ‘tactical’ bounce in the beaten down USD shouldn’t last too long or extend too far. In our opinion, the more challenging US economic environment points to the US Fed delivering a series of rate cuts over the next few quarters. We believe the balance of risks reside with the Fed delivering an easing cycle closer to what markets are projecting than its own updated forecasts. Over the coming months we think the mix of slower US growth, downshift in US interest rates, and/or reduced inflows into US assets should see the USD trend lower.
Global event radar: BoJ (Today), 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 firmer USD in the wake of the US Fed update not being able to match ‘dovish’ expectations has combined with some domestic economic forces to exert more pressure on the NZD and AUD (see above). The NZD has underperformed (now ~$0.5884, close to its 1-year average) after the large contraction in NZ GDP opened the door to the RBNZ delivering an outsized rate cut in October and more easing after that. Markets are now factoring in a ~40% chance the RBNZ announces a 50bp reduction in a few weeks’ time with another 25bp cut further out also discounted. The struggling NZ economy, which has gone backwards the past year, has more slack than anticipated. We believe this supports the case for the RBNZ to lower the cash rate (now ~3%) to more ‘stimulatory’ levels. In our view this is an underlying headwind for the NZD, with the diverging economic and interest rate trends in Australia’s favour pointing to further AUD/NZD strength (now ~1.1238, the top end of its ~3-year range).
The AUD (now ~$0.6613) has also drifted back further with yesterday’s underwhelming Australian jobs report an additional factor. Topline employment was weaker than forecast with 5,400 jobs lost in August. This was driven by full-time, though we would note the full-time/part-time split has been in a zigzag pattern the past few months with July gains partially unwound in August. However, under the hood, the less volatile trend series (which strips out the monthly noise) shows employment growth is still positive (1.7% higher compared to a year ago). This was also observed in the unemployment rate which held steady at 4.2%. Based on the broader stats while the labour market isn’t as tight as it was it is still holding up ok. As our chart shows, the Australian unemployment rate is below average and hasn’t risen as far as many other nations. This is in part due to the RBA’s decision not to raise interest rates as high as elsewhere to preserve as many of the post-COVID job gains as it could. As we have seen so far this cycle this also means that on the way down the RBA may only be able to deliver gradual/limited policy easing.
More short-term volatility in the USD and AUD/USD is possible as markets continue to digest yesterday’s US Fed update. But over the medium term (i.e. next ~3-12 months) we remain of the view that the AUD should grind higher. We think the AUD can be supported by a mix 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.
AUD & NZD event radar: BoJ (Today), 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): 0.6530, 0.6580 / 0.6660, 0.6710
NZD levels to watch (support / resistance): 0.5800, 0.5850 / 0.5950, 0.6010
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events)
FRIDAY (19th September) JPY BoJ Decision (no set time) 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)
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