Market Briefing: Holding steady
Limited moves. US equities ticked up, while bond yields & the USD eased. AUD treading water just above its 1-year average.
AU CPI. Q3 inflation due next week. Gov. subsidies will see headline CPI fall. But improvement in core inflation should be more limited.
US politics. US election around the corner. Chances of a Trump win have risen. But the result may not be known for days/weeks after the event.
Limited moves across markets overnight, although on balance there was a slight improvement in the underlying tone. On the back of a ~22% surge in the megacap Tesla’s share price after its earnings beat expectations the broader S&P500 recorded a positive session (+0.2%). By contrast, bond yields drifted a touch lower with the benchmark US 10yr rate shedding ~3bps (now ~4.21%). This in turn took a little heat out of the USD despite the US business PMIs coming in better than anticipated. The composite US PMI is consistent with a steady rate of growth in Q4.
USD/JPY tracked the modest dip in yields lower (now ~151.85), and EUR nudged up (now ~$1.0825) after some of the Eurozone PMI data was not as bad as feared, primarily out of Germany. That said, the level of the Eurozone business surveys still suggests weak momentum, especially across manufacturing, supporting the case for further policy easing by the ECB. Another 4 ECB rate cuts are factored in by next April, with a small chance an outsized 50bp reduction is delivered in December still discounted. Elsewhere, GBP ticked higher (now ~$1.2970), despite slightly larger than projected falls in the UK PMIs. News the UK government was planning to change fiscal rules to allow more borrowing for investment generated a GBP supportive uptick in UK yields (UK 10yr +4bps to 4.24%). The softer USD and improved market tone helped the NZD (now ~$0.6013) and AUD (now ~$0.6639) consolidate after a couple of negative sessions recently.
The global data calendar is light today, but there are a few important releases next week including Q3 US GDP (Weds night AEDT), the US PCE deflator (Thurs night AEDT), and monthly US jobs report (Fri night AEDT). Nevertheless, the data flow looks set to play second fiddle to the fast-approaching US Election (5 November). Odds former President Trump retakes the White House have risen with a Republican sweep of Congress also looking possible. Trump’s combative trade policies, greater fiscal spending, and push to curb US immigration are generally viewed as being USD positive due to the spillover impacts on US inflation and in turn interest rates. On top of that, uncertainty about the outcome might also trigger market nerves (and USD support). Because of the increased usage of mail-in voting it may take days (or weeks) for the result to be known, especially considering the closeness in the polls across battleground states. This mix also suggests re-counts and/or court challenges are possible. During the 2000 Bush/Gore dispute, which ended up in the Supreme Court, there was an initial knee-jerk rise in the USD because of political uncertainty.
Global event radar: US GDP (30th Oct), BoJ Meeting (31st Oct), China PMIs (31st Oct), EZ CPI (31st Oct), US PCE Deflator (31st Oct)
AUD corner
The AUD has tread water over the past 24hrs with a slightly softer USD due to a modest dip in US yields counteracting underperformance on the crosses. At ~$0.6640 the AUD is hovering just above its 1-year average with yesterday’s ~0.6% intra-day range only around half its long-run average. On the crosses the AUD eased by ~0.3-0.5% versus the EUR, JPY, and GBP, while AUD/NZD and AUD/CNH consolidated. By contrast, AUD/CAD (now ~0.9194) recouped some of yesterday’s falls.
The next piece of important local economic data is Q3 CPI (next Wednesday). Due to the mechanical drag from government subsidies/electricity rebates headline inflation is projected to slow to 3%pa. But, improvement in core CPI (which provides a better guide to the true inflation pulse) should be more limited. This is what the RBA is lasering in on, as headline inflation will rebound once government policies end. In our view, underlying inflation trends combined with the resilient labour market means RBA rate cuts may be some time away. We believe the start of a modest RBA rate cutting cycle is a story for H1 2025. As our chart shows, partly due to the RBA’s less restrictive settings, core inflation in Australia has been bucking the improving global trend over the past few months.
Over the medium-term, we believe the divergence between the RBA and others should be AUD supportive, especially versus the EUR, CAD, GBP, and NZD where their central banks are lowering rates because of weaker growth and slowing inflation. That said, against the USD, there are larger factors currently in play which might keep the AUD on the backfoot. The US Election is coming into view, and as outlined chances former President Trump wins and pushes through his agenda of large-scale tariffs and greater fiscal spending has risen. This mix is generally viewed as being USD positive.
AUD event radar: AU CPI (30th Oct), US GDP (30th Oct), BoJ Meeting (31st Oct), China PMIs (31st Oct), EZ CPI (31st Oct), US PCE Deflator (31st Oct)
AUD levels to watch (support / resistance): 0.6580, 0.6600 / 0.6680, 0.6700
Market Moves
Peter Dragicevich
Currency Strategist - APAC
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FRIDAY (25th October)
JPY Tokyo CPI Inflation (Oct) (10:30am)
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