Market Briefing: Gearing up for US inflation
US PPI. Some vol. around US PPI. ‘Sticker shock’ of a higher print faded as participants digested the details. On net, US stocks higher, yields & USD lower.
AU Budget. Relief measures designed to reduce 'headline' CPI. But risks around core inflation remain. RBA still on a different path to its peers.
Data flow. Locally, Q1 wages due. Tonight US CPI & retail sales released. Softer US core CPI/retail sales could revive longer-dated Fed easing bets.
There was a modest burst of intra-session volatility across markets overnight after the ‘sticker shock’ of a higher-than-expected US Producer Price Index rattled some nerves. However, as participants digested the detail and realised a large jump in portfolio management fees explained the bulk of the upside surprise, and that the bits and pieces which flow through to the US PCE deflator (the US Fed’s preferred inflation gauge) such as medical services and airfares were softer sentiment improved. A repeat by Fed Chair Powell of his comments that policymakers feel rates are high enough and they just need time to work also helped the turnaround.
In the end, the US S&P500 ended trade higher (+0.5%) with the tech-focused NASDAQ outperforming (+0.8%). US bond yields fell back with the 2yr and 10yr rates shedding ~5bps. This exerted a bit of downward pressure on the USD. EUR (now ~$1.0815) is near a 1-month high. GBP rose (now ~$1.2590) despite signs the cracks in the UK labour market are widening and comments by BoE Chief Economist Pill that it isn’t unreasonable to believe a rate cut “will come under consideration” during the UK summer. Data wise, UK employment was weaker and UK unemployment rate increased to 4.3% (a high since last July). And while UK wage growth was slightly firmer than consensus forecasts it wasn’t that different to what the BoE was anticipating. USD/JPY consolidated around ~156.40, while USD/SGD eased towards ~1.3520. The positive risk vibes helped NZD edge a little higher (now ~$0.6040, the upper end of its 1-month range). The AUD also nudged up (now ~$0.6625) with the Federal Budget announcement generating limited direct reaction.
Global focus will remain in the US tonight with the release of April CPI inflation and retail sales (10:30pm AEST). We continue to see US core CPI moderating from the higher average monthly run-rate recorded in Q1 as the boost to areas like vehicle insurance, medical services, and rents wanes. The annual rate of US core inflation is seen slowing to ~3.6%pa, which if realised would be a low since early 2021. Added to that we think US retail sales also lost momentum as the temporary boost from tax refunds in prior months fades and weakening fundamentals like lower confidence reassert themselves. In our opinion, this type of mix could revive longer-dated US Fed policy easing bets and weigh on the USD. As our chart shows, the correlation between the USD and US rate expectations has been quite high recently.
Global event radar: US CPI & Retail Sales (Tonight), China Data Batch (Fri), Canada CPI (21st May), RBNZ Meeting (22nd May), UK CPI (22nd May), US/European PMIs (23rd May), Japan CPI (24th May), Eurozone CPI (31st May), US PCE Deflator (31st May)
AUD corner
The AUD whipped around overnight in the wake of the US Producer Price data with the initial knee-jerk lift in US bond yields and the USD on the back of the higher topline result fading as participants digested the detail (see above). The turnaround in risk sentiment underpinned an AUD rebound, which at ~$0.6625 is tracking in the upper end of its 1-month range. The AUD also held its ground on the crosses. AUD/EUR (now ~0.6125) and AUD/GBP (now ~0.5260) are little different from this time yesterday. AUD/JPY has extended its recovery (now ~103.65), while a slightly stronger NZD has seen AUD/NZD drift a touch lower (now ~1.0970).
Locally, the Federal Budget was released last night. Higher commodity prices and stronger employment means a second straight surplus is projected (~A$9.3bn in FY24). However policy decisions mean a return to deficit is anticipated next year. The major policies, many of which were pre-announced, included the adjusted stage 3 income tax cuts, increased rental assistance, electricity relief for all households, a lowering of tertiary student debt, the Future Made in Australia strategy, and funds to help build extra housing.
A focus for us and markets remains on the inflation trajectory. As we had suspected the various big-ticket cost of living relief measures were again crafted in a politically savvy way that reduces ‘headline’ inflation. The Federal Treasury is forecasting headline inflation to get back into the RBA’s 2-3% target band by early 2025. However, for the economy and RBA it won’t be that simple. The measures set to mechanically drag on headline CPI are likely to be ‘trimmed out’ of core inflation. There is also a risk the additional fiscal spending (which is front-loaded over the next few years, averaging an extra A$10bn in FY25 and FY26) and/or a portion of the savings for households and businesses stemming from the ‘relief’ initiatives are re-circulated back into the economy. This may create more demand and stickier core inflation down the track than would otherwise be the case. We believe that the RBA will remain alert to the possible lingering medium-term challenges for core inflation. And as such, we continue to think the RBA will remain on a different path to many of its global counterparts when it comes to when it starts and how far it goes during the next easing cycle.
Ahead of tonight’s US CPI and retail sales data (10:30pm AEST), Q1 Australian wages are due (11:30am AEST). Based on the slow-moving wage dynamics and tightness in the labour market annual wage growth is predicted to hold up at its cyclical highs (mkt 4.2%pa). This is a positive impulse for services inflation. In our judgement, a solid Australian wages print coupled with a moderation in US core inflation and/or softer US retail sales (see above) is likely to reinforce the diverging monetary policy expectations theme with a flow on shift in bond yield differentials AUD supportive.
AUD event radar: AU Wages (Today), US CPI & Retail Sales (Tonight), AU Jobs (Thurs), China Data Batch (Fri), Canada CPI (21st May), RBNZ Meeting (22nd May), UK CPI (22nd May), US/European PMIs (23rd May), Japan CPI (24th May), AU Retail Sales (28th May), AU CPI (29th May), Eurozone CPI (31st May), US PCE Deflator (31st May)
AUD levels to watch (support / resistance): 0.6520, 0.6570 / 0.6640, 0.6660
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
WEDNESDAY (15th May)
AUD Wage Price Index (Q1) (11:30am)
EUR GDP (Q1 P) (7pm) EUR Industrial Production (Mar) (7pm)
EUR ECB’s Villeroy Speaks (7pm)
USD Empire Manufacturing (May) (10:30pm)
USD CPI Inflation (May) (10:30pm)
USD Retail Sales (Apr) (10:30pm)
THURSDAY (16th May)
USD NAHB Housing Index (May) (12am)
USD Fed’s Kashkari Speaks (2am)
AUD RBA’s Hunter Speaks (9:40am)
JPY GDP (Q1) (9:50am)
AUD Jobs Report (Apr) (11:30am)
GBP Jobs/Wages (Mar/Apr) (4pm)
EUR ECB’s Panetta Speaks (7pm)
GBP BoE’s Greene Speaks (9pm)
EUR ECB’s Villeroy Speaks (10:15pm)
USD Housing Starts/Building Permits (Apr) (10:30pm)
USD Philly Fed Outlook (May) (10:30pm)
USD industrial Production (Apr) (11:15pm)
FRIDAY (17th May)
USD Fed’s Harker Speaks (12:30am)
USD Fed’s Mester Speaks (2am)
USD Fed’s Bostic Speaks (5:50am)
CNY Industrial Production (Apr) (12pm)
CNY Retail Sales (Apr) (12pm)
CNY Fixed Asset Investment (Apr) (12pm)
EUR ECB’s Vasle Speaks (5pm)
EUR ECB’s Vujcic Speaks (5:30pm)
GBP BoE’s Mann Speaks (6pm)
EUR CPI Inflation (Apr F) (7pm)
EUR ECB’s Vasle, Holzmann & Kazaks Speak (10:30pm)
SATURDAY (18th May)
USD Leading Index (Apr) (12am)
*Note, all times/dates provided are AEST