Market Briefing: Good news is bad news?
Bond sell-off. The upswing in bond yields continues. This is underpinning the USD. The Fed's higher for longer view is being priced in.
US data in focus. US inflation and retail sales data released this week. Stronger data should reinforce the uptrend in US rates and the USD.
AUD volatility. A number of local and US events on the radar. RBA Governor Lowe speaks. But the US releases could be more impactful.
US equities were little changed on Friday (S&P500 +0.2%), though it was a negative week, with the major US indices recording their biggest falls in ~2-months (S&P500 -1.1%, NASDAQ -2.4%). One of the main catalysts has been the repricing in US rate expectations and bounce back in bond yields. This continued Friday, with the US 2-year yield up another ~4bps (now 4.52%, highest since late-November) and the 10-year up ~7bps (now 3.74%, highest since early-January). The upswing in US yields and shift in interest rate differentials continues to support the USD. EUR has dipped back below 1.07, USD/JPY is hovering up around 131.50, and the AUD is currently tracking just above 0.69.
Market focus will remain on the US this week with the release of the January CPI inflation (Wednesday AEDT) and retail sales (Thursday AEDT) data, and with several US Fed members speakers. We expect the Fed speakers to reiterate the ‘higher for longer’ interest rate view, and stress that the Fed will ‘keep at it’ until it is convinced the battle against inflation has been won.
Data-wise, given the sensitivity to inflation news and the pulse of the US economy, we expect volatility to be elevated this week. And although surprises in either direction should generate an impact, we think the larger reaction in US interest rates and the USD could be to signs the US economy started 2023 on a stronger footing and/or inflation is holding up. This is where we think the risks reside, with indicators like car sales and gasoline prices pointing to a rebound in US retail sales following the weak end to 2022. Similarly, while base-effects (as last year’s Ukraine war induced price spike start to roll out of calculations) point to the annual rate slowing, the monthly data could show inflation is re-accelerating, a sign that it may not be as easy as people think to get back down to the Fed’s 2%pa target.
In our opinion, this type of data mix could see US bond yields continue to move higher, supporting the USD. Indeed, as the chart shows, US bond yields only typically top out around the time the Fed policy rate has peaked, with the levels also roughly in-line. With the Fed set to deliver more rate hikes over the next few months there looks to be more upside in US yields, in our opinion. This could be a negative for risk sentiment, and a positive for the USD.
Global event radar: US CPI (15th Feb), US retail sales (16th Feb), Eurozone PMIs (21st Feb), FOMC meeting minutes (23rd Feb).
AUD is hovering just above 0.69, ~3.4% below the early-February high. The AUD has experienced intermittent bouts of volatility the past month, and we think that this should continue this week given the number of local and US macro events on the horizon. All up, however, on the back of a stronger USD our bias is for the AUD to edge lower, with the 50-day (0.6873) and 200-day (0.6805) moving averages key support levels.
Locally, RBA Governor Lowe testifies to Parliament (Wednesday and Friday), and the January employment report is released (Thursday). We expect Governor Lowe to repeat the ‘hawkish’ tone contained in last week’s post-meeting statement, and emphasize that to prevent a wage-price spiral from developing further cash rate increases are anticipated. However this is also projected to generate a meaningful slowdown in economic activity and higher unemployment over the year ahead. That said, this interest rate view now seems more than well priced in, in our opinion, with the market discounting a RBA cash rate peak of ~4.15% by August. We see the cash rate reaching 3.85% by April/May.
FX is a relative price, and on this score, we think US developments could overshadow domestic events this week. US inflation (Wednesday) and retail sales (Thursday) are due. We think the risks are tilted to the data showing that the US economy kicked off 2023 in a stronger spot, and that inflation is holding up and remains a long way from the Fed's 2%pa target. Markets look to be in a ‘good news is bad news’ frame of mind, with the outlook for US interest rates a key input. In our view, stronger US activity data and/or ‘sticky’ inflation should reinforce the upshift in US interest rate expectations, weighing on risk sentiment, and supporting the USD. Relative interest rate differentials look set to remain in the US' favour, acting as a AUD headwind.
AUD event radar: RBA Gov. Lowe speaks (15th Feb), US CPI data (15th Feb), AU jobs data (16th Feb), US retail sales (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): 0.6805, 0.6874 / 0.7050, 0.7172
USD/SGD has continued to tick higher, in-line with the uptrend in US bond yields. At 1.3291 USD/SGD is now ~2% above its early-February low. We remain of the view that there is scope for a further rise in the USD (and USD/SGD) over the period ahead, with a test of the 50-day moving average (1.3348) looking likely.
This week the focus will be on the US CPI inflation and retail sales data, with several US Fed members also speaking. Volatility around the US releases, particularly the inflation print, should be high, but in terms of market reaction we believe a relatively larger one could be generated by signs the US economy is holding up and/or inflation is ‘sticky’. This is where we think the risks reside based on leading indicators such as auto sales, and after the annual benchmark revisions to the US CPI showed that underlying inflation momentum over H2 2022 was stronger than earlier thought. We believe a combination of positive US retail sales data and re-accelerating monthly CPI inflation should affirm the re-pricing in US rate expectations, supporting the USD.
SGD event radar: US CPI (15th Feb), 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
MONDAY (13th February)
No major economic events/data scheduled.
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