Market Briefing: Growth air pocket
US markets. US equities rose, bond yields ticked up. USD firmer. Positive US data compounded softer EZ inflation. AUD near 1yr average.
AU GDP. Partial inputs suggest the AU economy hit an air pocket in Q1. GDP could undershoot consensus. This might exert some pressure on AUD.
US macro. Job openings higher than expected. But the detail still shows conditions are loosening. Monthly US jobs report due later this week.
Global Trends
There have been a couple of modest pockets of volatility over recent days as the US data painted a mixed picture about the state of play in the economy. In contrast to the subpar US ISM manufacturing survey released earlier in the week the JOLTS report (a guide to labour demand) positively surprised overnight, at least at a topline level. This supported sentiment with the S&P500 rising for the second straight day (+0.6%). US bond yields also nudged up. At ~4.45% the US 10yr rate is hovering near its multi-month average. In FX, the USD recouped lost ground to be back around where it opened the week. EUR softened (now ~$1.1374) with the US data compounded by softer Eurozone inflation which reinforced bets the ECB will cut rates again on Thursday (now 2.3%pa, its slowest pace in a few years). GBP softened (now ~$1.3519), while USD/JPY rose (now ~144). AUD (now ~$0.6464) and NZD (now ~$0.60) drifted back with a downside surprise in the China Caixin manufacturing PMI another factor exerting a bit of downward pressure the past 24hrs.
In terms of the US data, as stated the headline figures were a little better than forecast with job openings rebounding in April. That said, when you scratch below the surface there are signs the US jobs market is cooling. As our chart shows, the ‘hiring rate’ is below average, the ‘quit rate’ has declined (a sign of less voluntary churn and confidence in finding work elsewhere), and the number of unemployed persons per job opening has been edging up. The labour market is a lagging indicator. As a rule of thumb, based on how long the hiring/firing process takes the unemployment rate today typically reflects how the economy was tracking ~3-6 months ago. Based on heightened uncertainty, still ‘restrictive’ monetary policy settings, and higher import costs faced be consumers and businesses we think the US economy should weaken over coming quarters. This in turn could see the unemployment rate rise, bringing US Fed interest rate cuts back into play later this year. In our opinion, this is one reason why the USD is set to trend lower over the medium-term.
Macro wise there are more US data releases due the next few days. The ISM services gauge is released tonight (12am AEST). The Bank of Canada also meets (11:45pm AEST) and markets/economists are split as to whether another rate cut will be delivered suggesting the prospect of some CAD volatility. On balance, as discussed at the start of the week, we think push-pull forces may generate a few intermittent bursts of USD volatility over the short-term, but on balance, we believe the USD risks weakening if the top tier data such as the monthly US jobs report (Fri night AEST) underwhelms.
Global event radar: AU GDP (Today), Bank of Canada (Tonight), ECB (Thurs), US Jobs (Fri), US CPI (11th June), China Data (16th June), Bank of Japan (17th June), US Retail Sales (17th June), US Fed (19th June), Bank of England (19th June)
Trans-Tasman Zone
The firmer USD has taken a little heat out of the AUD and NZD over the past 24hrs (see above). That said, the NZD is still hovering near the upper end of its multi-month range (now ~$0.60) while the AUD is tracking north of its 200-day moving average and is broadly inline with its 1-year average. On the crosses the AUD was more mixed with the softer EUR helping AUD/EUR nudge up (now ~0.5685). AUD/JPY also rose (now ~93.08). By contrast, AUD/GBP, AUD/CAD, and AUD/CNH shed ~0.2-0.7% compared to where they were this time yesterday.
In addition to USD trends, the AUD was also weighed down by sluggish China manufacturing data, a few ‘dovish’ headlines in the minutes of the last RBA meeting, and signs that today’s Q1 GDP report (11:30am AEST) might underwhelm. In terms of the RBA, as Governor Bullock already indicated in the post meeting press conference, the minutes stated the Board considered the case for a larger 50bp rate cut given downside risks stemming from global developments. But it delivered a 25bp reduction as it decided to move "cautiously" and "predictably". Data wise, based on the pre-GDP partial inputs such as government spending, inventories, and net exports, the Australian economy looks to have hit an air pocket in Q1 with weather-related disruptions larger than assumed. We think Q1 GDP growth could undershoot stale consensus and RBA predictions (mkt 0.4%qoq). If realised, this may exert some knee-jerk downward pressure on the AUD over the near-term.
However, as our chart shows, leading indicators suggest growth momentum should turn around over future quarters as the downshift in interest rates, larger population, still low unemployment, and fiscal spending support activity across various sectors. In our opinion, this means that beyond some possible short-term data driven volatility, the AUD can grind up over the medium-term. Particularly as we see the USD steadily losing ground over the longer-run as the Trump Administrations various policies crimp US growth and/or act to dampen investor confidence in holding US financial assets.
AUD & NZD event radar: AU GDP (Today), Bank of Canada (Tonight), ECB (Thurs), US Jobs (Fri), US CPI (11th June), China Data (16th June), Bank of Japan (17th June), US Retail Sales (17th June), US Fed (19th June), NZ GDP (19th June), AU Jobs (19th June), Bank of England (19th June)
AUD levels to watch (support / resistance): 0.6370, 0.6420 / 0.6500, 0.6540
NZD levels to watch (support / resistance): 0.5880, 0.5930 / 0.6020, 0.6090
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
WEDNESDAY (4th June) AUD GDP (Q1) (11:30am) USD Fed’s Bostic & Cook Speak (10:30pm) CAD Bank of Canada Decision (11:45pm)
THURSDAY (5th June) USD ISM Services (May) (12am) JPY Labor Cash Earnings (Apr) (9:30am) AUD Trade Balance (Apr) (11:30am) AUD Household Spending (Apr) (11:30am) CNY Caixin PMI – Services (May) (11:45am) EUR Germany Factor Orders (Apr) (4pm) GBP BoE’s Greene Speaks (5:45pm) GBP BoE’s Breeden Speaks (6:30pm) EUR ECB Decision (10:15pm) USD Initial Jobless Claims (10:30pm) USD Trade Balance (Apr) (10:30pm) EUR ECB Pres. Lagarde Speaks (10:45pm)
FRIDAY (6th June) USD Fed’s Kugler Speaks (2am) USD Fed’s Harker Speaks (3:30am) EUR ECB's Schmid Speaks (3:30am) EUR Germany Industrial Prod. (Apr) (4pm) EUR ECB’s Holzmann Speaks (6pm) EUR ECB’s Centeno Speaks (9pm) CAD Jobs Report (May) (10:30pm) USD Jobs Report (May) (10:30pm)
*Note, all times/dates provided are AEST
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