Market Briefing: Revived US inflation fears
US PPI. Much stronger than expected US producer prices rekindled inflation fears. US yields rose, as did the USD. AUD back below 1-month average.
AU jobs. Employment report broadly inline with forecasts. Unemployment hovering just above 4%. Supports the case for gradual RBA easing.
Data flow. China activity data due today. In the US, retail sales & industrial production out tonight. Data could generate more USD volatility.
Global Trends
There was a bit of a ripple across markets overnight on the back of resurfacing US inflation fears. US Producer Prices were much stronger than forecast with the 0.9% monthly gain the fastest pace in over three years. Annual core producer price inflation jumped to 3.7%pa from 2.6%pa. This was a risk we were flagging could happen over the past few days. A closer look under the hood finds that various Trump Administration policy decisions are having an impact. Higher tariffs are pushing up input prices for businesses in a few areas which might flow through to consumer prices down the track. There was a sizeable lift in home electronic equipment prices in July, and vehicle related costs rose. As our chart shows, the signal from business surveys is for producer prices to increase further over future months. Elsewhere, the upswing in equities is also playing a role with rising portfolio management fees in line with higher asset prices boosting services.
The hotter US PPI dampened the mood with recently built-up US Fed rate cut expectations pared back. Chances of a 50bp rate reduction being delivered in mid-September declined, though the odds of a 25bp cut coming through are still elevated (now ~92%). The adjustment in US Fed thinking pushed up bond yields 5-6bps across the curve and supported the USD, while US equities ended the day flat with the S&P500 hovering at record highs. EUR has dipped down to ~$1.1650, the interest rate sensitive USD/JPY edged up (now ~147.75), while cyclical currencies such as the NZD (now ~$0.5920) and AUD (now ~$0.6498) weakened.
Looking ahead the China activity data for July is released today (12pm AEST), while in the US retail sales and import prices are due (10:30pm AEST) with industrial production (11:15pm AEST) rounding things out. We continue to have a negative USD medium-term view based on our judgement higher import prices should slow activity which in turn could see the US Fed steadily lower interest rates over the next year. But, in the near term, particularly with the US Fed easing cycle looking well priced in, we believe the USD’s rebound may extend a little if the incoming US data shows the economy is still holding up.
Global event radar: China Data (Today), US Retail Sales (Tonight), RBNZ Meeting (20th Aug), Global PMIs (21st Aug), US PCE Deflator (29th Aug)
Trans-Tasman Zone
The AUD has been whipped around by domestic and offshore forces over the past 24hrs. But as is usually the case, with Australia and the AUD a price taker of what happens in the US, the AUD has lost ground due to the US PPI inspired rebound in the USD (see above). At ~$0.6498 the AUD is back below its ~1-month average, as is the NZD (now ~$0.5920). The shaky risk sentiment has also seen the AUD slip back on most of the major crosses with falls of ~0.2-0.4% recorded against the EUR, JPY, GBP, and CAD, and a slight larger decline posted versus CNH (-0.7%). By contrast, underperformance in the NZD has helped AUD/NZD nudge up (now ~1.0977) to the top of its multi-month range.
In Australia the July labour force report was released yesterday and it came in largely as expected. Employment growth picked up with 24,500 jobs added, and the volatility in the full-time/part-time split continued. This, and steady participation, saw the unemployment rate dip back a touch to 4.2%. While this is above its COVID-era trough it is still low by historical standards. In our view, the resilience in the Australian labour market supports the case for the RBA to remain on a gradual/cautious easing path. Leading labour demand indicators such as job ads, vacancies, and hiring intentions point to an average pace of employment growth over coming months and only a drift up in unemployment.
Medium-term this more measured RBA approach should be AUD supportive, as should the outlook for lower US interest rates as the US Fed re-starts its cutting cycle as soon as mid-September. That said, in the short-term we think the AUD is facing more downside risks given our thoughts the China data batch (12pm AEST) may show slower momentum in July and/or the upcoming US data (particularly retail sales (10:30pm AEST)) indicates consumer activity (the engine room of the US economy) is holding up. If realised, this could see markets further trim their Fed rate cut bets, which in turn might give the USD more support.
AUD & NZD event radar: China Data (Today), US Retail Sales (Tonight), RBNZ Meeting (20th Aug), Global PMIs (21st Aug), AU CPI (27th Aug)
AUD levels to watch (support / resistance): 0.6390, 0.6450 / 0.6520, 0.6580
NZD levels to watch (support / resistance): 0.5840, 0.5890 / 0.5950, 0.6000
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
FRIDAY (15th August) JPY GDP (Q2) (9:50am) CNY Retail Sales (July) (12pm) CNY Industrial Production (July) (12pm) CNY Fixed Asset Investment (July) (12pm) USD Empire Manufacturing (Aug) (10:30pm) USD Retail Sales (July) (10:30pm) USD Import Prices (July) (10:30pm) USD Industrial Production (July) (11:15pm)
SATURDAY (16th August) USD Uni. of Michigan Sentiment (Aug P) (12am)
*Note, all times/dates provided are AEST
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