Market Briefing: Inflation reality check
Higher for longer. US PPI data was higher than predicted, another sign inflation pressures remain strong and the US Fed has more work to do.
Negative risk sentiment. US long-end bond yields have risen further, the S&P500 has fallen, and the USD remains supported.
AUD lower. Shifting rate differentials and pull-back in risk assets are weighing on the AUD. RBA Governor Lowe speaks today.
A more cautious vibe across risk markets, with the US data and comments from US Fed officials reinforcing the higher-for-longer interest rate theme. US equities ended the day lower (S&P500 -1.4%), with long-end bond yields continuing to climb (the US 10yr yield rose another 5bps to be at 3.86%, a high for 2023) and the USD remaining firm. EUR remains sub 1.07, USD/JPY is hovering near 134, and the AUD is down near its 50-day moving average (0.6887).
The US Producer Price Index (PPI), usually considered a second-tier release, caught the market’s eye after coming in higher than predicted. The PPI is a measure of pipeline price pressures and gives a guide to future inflation. The stronger PPI, particularly the core measure (which excludes food, energy and trade services), and the services component is another sign that the pull-back in US inflation could be much slower than markets were anticipating, and that the US Fed has more work to do. Not helping matters, the US labour market is still in a strong spot. Weekly initial jobless claims once again came in historically low. A tight labour market feeds into wages and in turn ‘sticky’ services inflation.
Cleveland Fed President Mester, currently a non-voting member in 2023 though this may change given Vice Chair Brainard is moving to a different government role, stressed that policymakers aren’t done, and flagged the Fed could move back to raising rates by larger clips (“it’s not always going to be, you know 25…when the economy calls for it, we can move faster”). Her counterpart, St. Louis President Bullard (another 2023 non-voter) echoed this hawkish tone, noting it “will be a long battle against inflation” and that he wouldn’t rule out supporting a 50bp hike in March.
In our view, the upswing in US rate expectations should continue to underpin the USD. At the same time, we continue to think some risk markets have underreacted to the jump up in bond yields, and are complacent to the growth impacts such ‘restrictive’ policy can generate. We continue to think that volatility may re-ignite over coming months as the economic fallout unfolds, another potential source of USD support.
Global event radar: Eurozone PMIs (21st Feb), FOMC meeting minutes (23rd Feb), China PMIs (1st Mar), BoJ meeting (10th Mar), US employment report (11th Mar), ECB meeting (17th Mar), US FOMC meeting (23rd Mar).
AUD is tracking down near its 50-day moving average (0.6886). Technically, this could be a pivotal line in the sand for the AUD, given it hasn’t been below the 50-day moving average since early-November. Fundamentally, our bias is for further near-term downside in AUD, with the 200-day moving average (0.6806) in its line of sight. The stronger USD, shaky risk sentiment, and shift in relative interest rate differentials as the market factors in a higher-for-longer US Fed given the recent run of US inflation and spending data, and begins to question how high the RBA may raise rates this cycle is weighing on the AUD. These trends can remain in place a while yet, in our view.
The January employment data was weaker than expected. Employment fell by 11,500, and unemployment ticked up to 3.7%. There may be some seasonal features that suggest the data was not as bad as the headlines suggest, but from our perspective the bigger picture story is that the labour market is past its peak and unemployment looks set to move higher over 2023 as the RBA’s aggressive actions slow growth. Outside the pandemic this is the first back-to-back fall in employment since 2016. Various measures of labour demand (job ads, hiring intentions) look to have topped out and uncertainty about the future has risen, pointing to less job creation down the track. At the same time, reopened international borders is boosting labour supply. This mix, in our mind, could see unemployment rise faster than the RBA is forecasting.
Still well-above target inflation should see the RBA deliver further rate rises over the next few months. We have penciled in a move up in the cash rate to 3.85% by April/May. This is likely to be the message RBA Governor Lowe repeats when he gives Parliamentary Testimony today (from 9:30am). However, we continue to believe market pricing looking for the cash rate to peak at ~4.10% by September is slightly too aggressive given signs the economy and labour market are responding to the policy tightening flowing through the system. At some point the RBA’s focus could become more two-sided, with more attention given to the growth risks.
AUD event radar: RBA Gov. Lowe speaks (today), AU wages (22nd Feb), RBNZ meeting (22nd Feb), AU retail sales (28th Feb), AU GDP (1st Mar), China PMIs (1st Mar), RBA meeting (7th Mar), BoJ meeting (10th Mar), US employment report (11th Mar), ECB meeting (17th Mar), AU jobs data (16th Mar), US FOMC meeting (23rd Mar).
AUD levels to watch (support / resistance): 0.6806, 0.6887 / 0.7050, 0.7172
The upswing in US long-end bond yields (the US 10yr yield is now at its highest level of the year) and shift in US Fed interest rate expectations continues to support the USD. USD/SGD is tracking above its 50-day moving average (1.3335) for the first time since early-November.
Our view remains that near-term pullbacks in the USD (and USD/SGD) should be limited. The US PPI data released overnight (see above) is yet another sign that inflation pressures remain strong, and that the US Fed still has more work to do to get inflation on a path back down to its 2%pa target. Additionally, we believe that market volatility could pick up over coming months as the effects of the large-scale policy tightening shows up more meaningfully in the global activity data, at a time inflation is still uncomfortably high. Heightened market volatility is typically positive for the USD.
SGD event radar: Eurozone PMIs (21st Feb), FOMC meeting minutes (23rd Feb), Singapore CPI (23rd Feb), China PMIs (1st Mar), RBA meeting (7th Mar), BoJ meeting (10th Mar), US employment report (11th Mar), ECB meeting (17th Mar), US FOMC meeting (23rd Mar).
SGD levels to watch (support / resistance): 1.3110, 1.3210 / 1.3445, 1.3590
Currency Strategist - APAC
FRIDAY (17th February)
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