Market Briefing: Macro divergence
The October edition of our Event Radar & Views In A Nutshell pack is here.
Divergence. European equities rose, while the S&P500 consolidated. US yields increased. EUR softer. Despite a firmer USD the AUD edged up.
Macro signals. ECB cut rates again. More easing expected. US retail sales stronger than anticipated. This & US election risks supported the USD.
AU jobs. AUD outperformed after the AU employment report was stronger than projected. RBA on a different path to its peers. China data due today.
Economic divergence between the Eurozone and US was on show once again overnight. As anticipated the European Central Bank cut interest rates by 25bps, the third move this easing cycle. And while ECB President Lagarde stressed a meeting-by-meeting approach for the future path of policy, comments that risks to growth are to the ‘downside’ and subsequent media reports indicating officials believe a reduction in December is ‘very likely’ given slowing inflation has reinforced ‘dovish’ market pricing. Markets are factoring in a solid chance the ECB steps things up and delivers a larger 50bp cut in December, with ~125bps of easing now discounted by mid-2025.
In the US weekly initial jobless claims improved and retail sales grew more than predicted in September. The retail sales 'control group', which feeds directly into US GDP, increased by 0.7%. Household spending accounts for ~3/4’s of US economic activity. The resilience in retail sales has seen markets trim their US Fed rate cut expectations a touch. Another rate reduction by the US Fed in November is still assigned a high probability (now ~92%), but odds of moves at subsequent meetings has been watered down to ~70-80%.
In terms of markets, while European equities powered ahead (EuroStoxx50 +0.8%) on the prospect of looser policy settings, the US S&P500 consolidated just below its record highs. Front-end Eurozone bond yields eased (German 2-year rate dipped ~2bps), while the US 2yr edged higher (+3bps to 3~3.97%) and the benchmark US 10yr yield rose ~8bps (now ~4.09%). This mix exerted downward pressure on the EUR which hit its lowest point since early-August (now ~$1.0830). The softer EUR, the major USD alternative, and uptick in the interest rate sensitive USD/JPY (now ~150.20) supported the USD index. USD/CAD also increased (now ~1.3798, near the upper end of its recent range). That said, it hasn’t all been one-way traffic. The positive risk vibes saw NZD hold its ground (now ~$0.6058), with yesterday’s strong Australian jobs report also helping the AUD outperform (now ~$0.6695).
Today during the Asian session China activity data is released (1pm AEDT). In addition to the monthly indicators Q3 GDP is also due. Quarterly growth is projected to have accelerated (from 0.7%qoq to 1.1%qoq), yet that won’t be enough to stop annual growth from slowing (mkt 4.5%pa). We think signs China’s economy is losing a bit of momentum might actually be taken positively as it may bolster expectations more stimulus should be injected in the period ahead. However, we doubt it is likely to change the stronger USD undercurrent that is flowing through markets at present. In addition to diverging macro trends, the looming US Presidential Election and greater perceived chance former President Trump retakes the White House are USD positive factors, particularly given his platform of large-scale tariffs and greater fiscal spending which could generate a positive US inflation and interest rate impulse.
Global event radar: China GDP (Today), Global PMIs (24th Oct), BoC Meeting (24th Oct), US GDP (30th Oct), BoJ Meeting (31st Oct), China PMIs (31st Oct), EZ CPI (31st Oct), US PCE Deflator (31st Oct)
AUD corner
Despite the firmer USD, the AUD has edged up over the past 24hrs (now ~$0.6695) with outperformance on the crosses an underlying driver. In addition to domestic economic factors (see below) AUD/EUR has been supported by the overnight ‘dovish’ ECB interest rate cut. At ~0.6183 AUD/EUR is around ~1% from its 2024 highs. The AUD has also risen by ~0.8% versus the JPY (now ~100.55) and CAD (now ~0.9238), while it ticked up against CNH (now ~4.7798, above its 1-year average), NZD (now ~1.1050), and GBP (now ~0.5145).
The September Australian labour force survey was released yesterday. It showed that things remain in solid shape with the data exceeding expectations. Employment rose sharply (+64,100), with full-time jobs leading the charge. Despite greater labour supply the unemployment rate dipped down to 4.1%. Other measure of slack such as the underemployment rate improved, with the employment-to-population ratio rising to a record. The Australian jobs market continues to defy gravity with employment running at 3%pa, above its long run average. Notably, despite the slowdown in growth across many sectors on the back of the jump up in interest rates and cost of living pressures, the unemployment rate has effectively moved sideways over 2024. As pointed out previously growth has decelerated but the level of activity, particularly across the labour-intensive services sectors, remains above of its pre-COVID trend. This is holding down unemployment and keeping domestic/services inflation sticky. The data supports our long-held assumption that the start of a modest and limited RBA interest rate cutting cycle remains a story for H1 2025.
From our perspective, still robust Australian labour market conditions and the diverging monetary policy impulse between the RBA and others should be AUD supportive, particularly against currencies like the EUR, CAD, GBP, and NZD, where their respective central banks have begun to ease policy. Expectations authorities in China will provide more stimulus to bolster activity if today’s data underwhelms (1pm AEDT) may also give the AUD a helping hand, in our opinion. That said, against the USD we believe the AUD’s potential near-term upside could be more constrained due to the looming US election and rising odds former President Trump retakes the White House. Trump’s policy platform is generally viewed as being USD positive.
AUD event radar: China GDP (Today), Global PMIs (24th Oct), BoC Meeting (24th Oct), 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): 0.6605, 0.6630 / 0.6720, 0.6750
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
FRIDAY (18th October)
JPY CPI Inflation (Sep) (10:30am)
CNY GDP (Q3) (1pm)
CNY Monthly Activity Data (Sep) (1pm)
GBP Retail Sales (Sep) (5pm)
USD Housing Starts/Building Permits (Sep) (11:30pm)
SATURDAY (19th October)
USD Fed’s Kashkari Speaks (1am)
USD Fed’s Waller Speaks (3am)
*Note, all times/dates provided are AEDT