Market Briefing: In the eye of the beholder
US CPI in focus. Something for everyone in the CPI report. A deep dive suggests the US' inflation problem isn't going away any time soon.
US rates adjusting. Equities and FX were volatile, but little changed. But bond markets see the issue. US rate expectations have risen further.
AUD holding. We think the USD has under-reacted to the shift in US rates. This is a headwind for the AUD. RBA Governor Lowe speaks today.
A mixed reaction to the US CPI, with something for the bulls and the bears in the data. US equities endured some intra-day volatility but ended the day roughly flat. Similarly, the USD Index whipped around, before finishing up marginally higher, though this has mainly been a USD/JPY story with the interest rate sensitive pair back above 133 for the first time since early-January. AUD traded in a ~1 cent range around the US CPI release and has settled a touch higher (now ~0.6985).
By contrast, there was a sizeable further repricing in US interest rate expectations. Markets are now factoring in a Fed funds rate peak of ~5.3% by August, with an eventual rate cutting cycle also watered down. As a result, US bond yields have lifted, with the 2-year yield up another 11bps to 4.62% (a high since November) and the 10-year rising 6bps to 3.76% (a 2-month high).
While annual US inflation continued to slow as base effects from last year’s large spikes start to roll out of calculations, the pace was a bit less than predicted. Headline and core inflation eased just 0.1%pt to 6.4%pa and 5.6%pa respectively. The monthly pace of inflation indicates that underlying momentum is still too strong, that the US’ inflation problem doesn’t look to be going away any time soon, and that a return to the Fed’s 2% target is a long way off. A look under the hood shows that goods disinflation is slowing, and at the same time services inflation continues to accelerate (core services inflation is now running at 7.6%pa, the highest since 1982). Services inflation is a larger share of the CPI (~3/4’s of the basket), it is slow moving, and it can be a tough nut to crack without economic pain/job losses given how tied it is to wages. Comments by Feb members Logan, Barkin and Harker did not sugarcoat the ongoing inflation challenges, with the higher for longer interest rate mantra still a key message.
We are more inclined to agree with the bond market moves, and believe risk markets like equities, and the USD, under-reacted to the data and shifting interest rate backdrop, and/or remain complacent to the effects such restrictive policy could have on the US economy down the track. The lift in US rate expectations should limit near-term USD downside, in our view. Next up US retail sales are released (tonight 12:30am). Indicators point to a large jump in retail spending in January. A positive surprise should further reinforce, and possibly add to the upswing in US rates, as it could be a signal the Fed’s moves still aren’t getting enough traction. For risk markets it could be a case of 'good news is bad news'.
Global event radar: US retail sales (tonight), Eurozone PMIs (21st Feb), FOMC meeting minutes (23rd Feb).
AUD jumped around after the US CPI release, trading in a ~1 cent range, before settling to be marginally higher (~0.3%) compared to this time yesterday. As discussed above, the US CPI can be cut many ways, but in our view, the data shows the US’ inflation problem remains entrenched, with the pick up in sticky services prices a sign inflation may settle well above the Fed’s 2%pa target without further meaningful action to slowdown growth and weaken the US labour market. Risk markets continue to have a more optimistic view about the economic outlook, in our opinion. As these tensions play out, market volatility can return, and when combined with the higher US interest rate structure, we think upside in the AUD over coming months could be limited.
In today’s Asian trade, RBA Governor Lowe appears before the Senate Economics Committee (from 11:15am). On the policy front, we expect Governor Lowe to reiterate that the RBA expects rates to rise further over coming months. However, we think this view now looks more than well priced with markets discounting an RBA cash rate peak of ~4.15% by August. In our judgement there is still scope for US expectations to adjust, hence we believe relative rate differentials should remain in the US’ favour.
In terms of Governor Lowe, we also think markets will be attentive to comments around how the RBA is juggling the unfolding slowdown and downside risks to the growth outlook against the need to get inflation back down to target, and/or what the bar is to ‘pause’ the hiking cycle. Indicators continue to show consumers are starting to react negatively to the large lift in rates and cost of living pressures. Consumer confidence has plunged to historic lows, and as our chart shows this points to a step down in retail spending over 2023. This supports our forecast for the RBA cash rate to top out at ~3.85% in April/May.
AUD event radar: RBA Gov. Lowe speaks (today), US retail sales (tonight), AU jobs data (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): 0.6806, 0.6880 / 0.7050, 0.7172
USD/SGD, like most other currencies, was volatile around the US CPI release, but on net it is little changed from this time yesterday (now ~1.3283). In our view, the underlying bits and pieces in the US inflation data shows that the Fed still has a fight on its hands and that US interest rates need to rise further and stay at very high levels for some time in order for the services inflation problem to wash out of the system. Interest rate markets have adjusted further, and we think this upward shift should remain USD (and USD/SGD) supportive over the period ahead.
We believe that unlike the US bond market, risk assets and the USD may have underreacted to the underlying information contained in the US CPI report given it suggests inflation could struggle to get back down to the Fed’s target without further policy action. Tonight, US retail sales are due. Various indicators point to a strong rebound in consumer spending at the start of 2023. A positive surprise should reinforce, or add to, the uptrend in US interest rates. We think this should limit USD (and USD/SGD) downside.
SGD event radar: US retail sales (tonight), Eurozone PMIs (21st Feb), FOMC meeting minutes (23rd Feb), Singapore CPI (23rd Feb).
SGD levels to watch (support / resistance): 1.3050, 1.3110 / 1.3342, 1.3445
Currency Strategist - APAC
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