Market Briefing: Rate expectations jolted
5th September 2024
The September edition of our Event Radar & Views In A Nutshell pack is here.
Mixed markets. Equities slipped again, while bond yields tumbled & the USD softened. JPY strengthened & the AUD clawed back a bit of ground.
US jolts. US job openings declined. US labour market is rebalancing. Fed rate cuts are coming. Non-farm payrolls will make or break the case for 50bps.
AU GDP. Weak growth in Q2, but the level of activity remains high. RBA Gov. Bullock speaks today on "the costs of high inflation".
A mixed performance across markets with some of the moves from the previous day extending while others, particularly in FX, partially unwound. European and US equities dipped with the S&P500 ending the day ~0.2% lower, its first back-to-back fall since early-August. Base metal and energy prices also remained on the backfoot with WTI crude oil (-1.6%) touching its lowest level (now ~US$69.25/brl) since last December. Iron ore is at the bottom of its 1-year range (now ~US$93/tonne) due to lingering demand and oversupply concerns in China.
Elsewhere, bond yields tumbled again with the US 10yr rate shedding another ~8bps (now ~3.76%, the lower end of its multi-quarter range), while the policy expectations driven US 2yr yield dropped by ~11bps (now ~3.75%) due to a ramping up of US Fed easing bets following more signs the labour market is losing steam. This has seen the USD lose ground with EUR (now ~$1.1085) and GBP (now ~$1.3145) ticking up and the interest rate sensitive USD/JPY declining to ~143.65. USD/JPY is now ~11% from its early-July multi-decade peak. USD/CAD also slipped slightly (now ~1.3510) with the weaker USD more than offsetting another Bank of Canada rate cut. The widely anticipated 25bp reduction, the third by the BoC this cycle, lowered rates to 4.25%. There should be more to come with the BoC noting it is reasonable to expect further cuts if price pressures wane in line with its forecasts, and that as inflation gets closer to target it will need to guard against economic risks. The NZD (now ~$0.6197) and AUD (now ~$0.6725) nudged up.
The US JOLTS job openings report was the focus overnight. The data provides a gauge of labour demand, hiring and firing rates, as well as jobs turnover. On net, the US labour market has rebalanced with demand cooling and supply improving. As our chart shows, the US Beveridge Curve (i.e. the relationship between unemployment and the job vacancy rate) has effectively normalized. Job openings have fallen to levels last seen in early-2021, the ratio of openings to unemployed persons is below where it was pre-COVID, the ‘hiring rate’ is below average, and the ‘quits rate’ is pointing to slower wage growth and inflation over the next 6-12 months. That said, in a still rather goldilocks scenario, outright ‘layoffs’ remain low.
In response to the data odds of the US Fed kick starting its easing cycle with outsized 50bp steps have risen. Markets are now factoring in ~143bps of easing by the US Fed over its next 4 meetings with a ~36bp move discounted in September. Friday nights US non-farm payrolls report could make or break the case for a 50bp cut. Hence, the reaction in US interest rates and FX could be binary with a stronger (weaker) US jobs report likely to be a USD positive (negative). As outlined recently, we think the US non-farm payrolls report risks positively surprising given some of the weakness last month appears weather related.
Global event radar: US Jobs Report (Fri), US CPI (11th Sep), ECB Meeting (12th Sep), China Data (14th Sep), US Fed Meeting (19th Sep), BoE Meeting (19th Sep), BoJ Meeting (20th Sep)
AUD corner
The decline in US bond yields and weaker USD on the back of more signs the US labour market is cooling has helped the AUD recoup a bit of lost ground. At ~$0.6725 the AUD is a little above its ~1-month range. That said, the AUD has generally consolidated on the major crosses with moves of -0.2% to +0.1% recorded against the EUR, GBP, NZD, CAD, and CNH over the past 24hrs. AUD/JPY has been a notable exception with another ~1% fall coming through as the shaky risk environment and lower global bond yields supporting the JPY. At ~96.60 AUD/JPY is nearly ~12% from its July peak and is approaching its ~2-year average.
Locally, Q2 GDP was released yesterday and the data confirmed what we already knew. The growth pulse is subdued with high interest rates and the cost of living squeeze constraining consumer spending, construction, and business investment. The Australian economy expanded by just 0.2% in Q2, lowering the annual run-rate to a meagre 1%pa. Outside of COVID this is the slowest annual pace since the early-1990’s recession. Growth across the private sector has stalled with strength in government spending and a surging population somewhat holding up aggregate demand. The population mirage is a key factor that has helped keep the economy from tipping back into ‘technical recession’. GDP per capita fell for the 6th straight quarter. Our forward-looking ‘private demand tracker’ indicates that subpar momentum, especially across the goods-producing and interest rate sensitive sectors, looks set to continue for another quarter or two. This should translate to a higher unemployment rate. This is the unfortunate price that needs to be paid to tame inflation. For more see Market Musings: Australia GDP: growth vs levels.
However, until that manifests more clearly, we doubt the RBA will pivot away from its ‘hawkish’ underlying tone. For the RBA the level of activity, especially compared to supply, is important. This is what influences inflation. As our chart shows, growth rates have slowed, but the level of demand across the larger and labour intensive services providing sectors remains high. RBA Governor Bullock speaks today on “the cost of high inflation” (1:05pm AEST). In our opinion, Governor Bullock is likely to hold the line inflation still isn’t where it needs to be and as a result rate cuts aren’t expected for a while. In our opinion, the diverging monetary policy outlooks should be AUD supportive on crosses like AUD/EUR, AUD/CAD, AUD/GBP, and AUD/NZD where their respective central banks have started to lower rates. For AUD/USD the upcoming US non-farm payrolls report (Friday night AEST) is the looming event risk. As mentioned, the USD (and in turn AUD) reaction could be binary with a positive surprise (which is where we think the risks reside) likely to generate a positive knee-jerk reaction in the USD (drag on the AUD).
AUD event radar: RBA Gov. Bullock Speaks (Today), US Jobs Report (Fri), US CPI (11th Sep), ECB Meeting (12th Sep), China Data (14th Sep), US Fed Meeting (19th Sep), AU Jobs (19th Sep), BoE Meeting (19th Sep), BoJ Meeting (20th Sep), RBA Meeting (24th Sep)
AUD levels to watch (support / resistance): 0.6670, 0.6700 / 0.6760, 0.6800
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
THURSDAY (5th September)
JPY Labor Cash Earnings (July) (9:30am)
AUD Trade Balance (July) (11:30am)
JPY BoJ’s Takata Speaks (11:30am)
AUD RBA Gov. Bullock Speaks (12pm)
EUR Germany Factory Orders (July) (4pm)
USD ADP Employment (Aug) (10:15pm)
USD Initial Jobless Claims (10:30pm)
FRIDAY (6th September)
USD ISM – Services (Aug) (12am)
EUR ECB's Holzmann Speaks (12am)
AUD New Home Lending (July) (11:30am)
EUR Germany Industrial Production (July) (4pm)
EUR GDP (Q2 F) (7pm)
CAD Jobs Report (Aug) (10:30pm)
USD Jobs Report (Aug) (10:30pm)
USD Fed’s Williams Speaks (10:45pm)
SATURDAY (7th September)
USD Fed's Waller Speaks (1am)
*Note, all times/dates provided are AEST
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