Market Briefing: Peak optimism?
Cautious tone to start the week. Higher than expected inflation out of Spain, and weaker German GDP remind markets that there are more twists and turns to come.
US Fed still in focus. Optimistic markets look at risk to a strong push back by the Fed to the rate cuts from mid-2023 view.
AUD starts the week on the backfoot. Ahead of the US Fed meeting, the China PMIs and AU retail sales data are released today.
A relatively more cautious vibe across financial markets. Central Banks in the US and Europe, key macro data, and US earnings results are on the radar this week. After a strong run, markets have paused for breath ahead of these major events. US equities have eased back (S&P500 -1.2%), oil and industrial metals prices have dipped, while bond yields have risen, particularly in Europe where a surprise jump in Spanish inflation looks to have unwound some of the market enthusiasm that central banks may be nearing the end of their respective rate rise cycles and/or could start to reverse course later this year. While on the growth front, the negative Q4 German GDP result (-0.2%qoq) has put a technical recession back in play. In FX, the USD has edged higher, with the pro-cyclical AUD falling back a bit over the past 24hrs.
The recovery in risk sentiment over recent months has largely been a function of China’s faster than expected COVID-reopening, resilient activity data that has raised hopes the downturns in the US and other major economies may not be as bad as feared, and assumption that the ‘peak’ and turn in inflation could see policymakers shift course and ease policy later this year. In our view, markets may have become too complacent and look vulnerable to a ‘reality check’ from central banks about how high rates could still go, and how long they made need to stay at elevated levels to definitively squash inflation. Similarly, policy works with a lag, hence the effects of last year’s rapid-fire synchronized global policy tightening have yet to manifest.
As shown below, the range of leading indicators for global industrial activity that we track are pointing to a solid slowdown in momentum over H1 2023. There is a risk that markets could be surprised by a drop-off in activity over coming months, triggering renewed bouts of volatility. The speed of China’s reopening is a positive impulse, and can help cushion the blow, but we doubt it can fully offset the slowdown set to come through across the other major economies. The IMF releases its latest World Economic Update today. Some upward revisions due to China appear likely, but the overall story should still be one of below average world growth and tough conditions in several countries in 2023. A weaker world economy is typically a supportive environment for the USD.
Global event radar: China PMI (today), US FOMC policy meeting/Fed Chair Powell speaks (2nd Feb), ECB policy meeting (3rd Feb), US employment report (4th Feb), US CPI (15th Feb).
The AUD has started the week on the backfoot. The modest bout of risk aversion, with US equities, energy prices and industrial metals lower overnight, has taken some of the heat out of the AUD. At ~0.7060, the AUD is ~1.2% below last Thursday’s high.
Based on the speed of the AUD’s upswing since bottoming in mid-October, and a look at the underlying drivers underpinning the move, we continue to see more near-term downside than upside risks. In our opinion, near current levels the AUD has been factoring in a lot of good news. Ahead of this weeks US Fed meeting (Thursday morning AEDT), where we see risks the USD could recoup some of its recent losses if the Fed pushes back strongly on the markets rate cuts from mid-2023 view, there are a few data points for the AUD to contend with during today's Asian session.
The China PMIs and Australian retail sales data for December are today. The end of zero-COVID is expected to generate a rebound in the PMIs. While normally an AUD positive, we would argue that much of the reopening euphoria may have already been discounted. As shown below, AUD appreciation has outpaced China’s activity pulse, indicating that an accelerating in momentum may have been pre-empted.
Locally, after a strong Black Friday induced November (+1.4%), retail sales are forecast to have declined slightly in December (mkt -0.2%). Trends in consumer spending are an important input into the outlook for how high the RBA ends up lifting interest rates this cycle. We think the jump up in interest rates, coupled with high household debt levels, other cost-of-living pressures, and downturn in the housing market should see consumption slow materially over 2023. A bigger than anticipated fall in retail sales may see interest rate markets tweak their thinking about the RBA interest rate peak, generating some near-term AUD weakness.
AUD event radar: China PMIs (today), AU retail sales (today), US FOMC meeting/Fed Chair Powell speaks (2nd Feb), ECB policy meeting (3rd Feb), US employment report (4th Feb), RBA policy meeting (7th Feb), US CPI data (15th Feb), AU jobs data (16th Feb), RBA Gov. Lowe speaks (17th Feb), AU wages (22nd Feb), RBNZ policy meeting (22nd Feb).
AUD levels to watch (support / resistance): 0.6962, 0.7040 / 0.7172, 0.7220
A slow start to the week for USD/SGD, with the pair hovering just above 1.3140. During today’s Asian session the January readings of the China PMIs are released. Consensus is looking for a reopening rebound in the PMIs. Early signs that China’s economy has re-awakened strongly from its COVID lockdown hibernation could provide some short-term support for Asian currencies (i.e. push USD/SGD slightly lower), in our view. However, given this week’s major macro events, we don’t believe any PMI-driven moves will extend too far.
Markets remain fixated on the upcoming US Fed and ECB policy meetings. A smaller 25bp rate rise by the Fed is priced in, while a 50bp hike is factored in for the ECB. In our opinion, the more important focus should be on what central banks say about the outlook, rather than what is delivered this week. And on this front, we think the market’s optimism that policy could be loosened later this year may be shaken. Based on the tightness in labour markets and still elevated ‘sticky’ services inflation, we think interest rates may need to stay higher for longer than markets now think. Relatively ‘hawkish’ messages that lean against the markets interest rate turnaround assumption may generate some volatility and/or see the USD claw back lost ground.
SGD event radar: China PMI (today), US FOMC policy meeting/Fed Chair Powell speaks (2nd Feb), ECB policy meeting (3rd Feb), US employment report (4th Feb), RBA policy meeting (7th Feb), US CPI (15th Feb).
SGD levels to watch (support / resistance): 1.3009, 1.3054 / 1.3260, 1.3330
Currency Strategist - APAC
TUESDAY (31st January)
JPY Industrial Production (Dec) (10:30am)
CNH Manufacturing & Services PMIs (Jan) (12:30pm)
USD IMF World Economic Outlook Update (12:30pm)
EUR GDP (Q4) (9pm)
WEDNESDAY (1st February)
USD Employment Cost Index (Q4) (12:30am)
AUD House Prices (Jan)
NZD Labour Market (Q4) (8:45am)
EUR CPI Inflation (Jan) (9pm)
THURSDAY (2nd February)
USD ADP Employment (Jan) (12:15am)
USD ISM Manufacturing (Jan) (2am)
USD JOLTS Job Openings (Dec) (2am)
USD FOMC Policy Meeting (6am)
USD Fed Chair Powell Speaks (from 6:30am)
AUD Building Approvals (Dec) (11:30am)
GBP Bank of England Policy Meeting (11pm)
FRIDAY (3rd February)
EUR ECB Policy Meeting (12:15am)
EUR ECB President Lagarde Speaks (from 12:45am)
AUD New Housing Finance (Dec) (11:30am)
SATURDAY (4th February)
USD Non-Farm Payrolls, Unemployment (Jan) (12:30am)
USD ISM Services (Jan) (2am)
*Note, all times/dates provided are AEDT