Market Briefing: Risk sentiment turning the corner
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Market swings. A few bursts of volatility the past few weeks. Sentiment was positive overnight with the S&P500 rising & AUD clawing back lost ground.
US data. US Government Shutdown remains in place. But given its importance the delayed US CPI report will be released this week (Fri night AEDT).
RBA pricing. Uptick in AU unemployment has seen markets price in a greater chance of another RBA cut. Q3 CPI due next week. This may temper views.
Global Trends
There have been a few bursts of volatility over the past week or so stemming from a mix of renewed US/China trade tensions, some relatively overhyped US credit market concerns, and in the case of Australia a few cracks appearing in the jobs market. On net however, key markets don’t look that far from where they were tracking earlier this month with participants generally looking through a lot of the noise created by the news flow.
More specifically, after another strong performance overnight the US S&P500 (+1.1%) is within striking distance of its record highs while the Russell2000 small cap index (arguably a better and more broad-based barometer of investor optimism) is near the top of its historical range. In Japan, the Nikkei225 was a standout (+3.4%), closing at a new peak, after the ruling LDP party secured a coalition deal which fueled hopes of stimulus policies being delivered by new PM Takaichi. Also helping the recovery in risk sentiment is the outlook for lower interest rates with the market continuing to price in multiple cuts by the US Fed. Almost 5 US Fed interest rate reductions are anticipated by late 2026. This is holding down bond yields with the US 10yr (now ~3.98%) and 2yr (now ~3.46%) rates around the lower end of their respective multi-month ranges. In FX, the USD index ticked up a bit overnight, with the EUR (now ~$1.1642) slipping back and USD/JPY (now ~150.70) nudging up. That said, the backdrop and largely better than anticipated China data batch which showed stronger than forecast Q3 GDP growth helped the NZD (now ~$0.5740) and AUD (now ~$0.6514) claw back a little lost ground.
The US Government Shutdown remains in place with the current iteration now the third longest in history. However, overnight comments by National Economic Council Director Hasset indicating “there’s a shot that this week things will come together” suggests there are glimmers of hope things reopen soon. The shutdown has limited US economic data releases. But with CPI inflation an important input into Social Security cost-of-living adjustments staff have been recalled to release the delayed September data later this week (Friday night AEDT). We think more tariff related impacts could show up in US ‘goods’ prices, yet softness in a few ‘services’ areas may be more over a powerful force which sees aggregate core inflation undershot consensus projections. If realised, we believe this might reinforce the case for the US Fed to deliver another rate cut later this month (and a few more over coming quarters) which in turn exerts downward pressure on the USD.
Global event radar: UK CPI (Weds), JP CPI (Fri), Global PMIs (Fri), US CPI (Fri), BoC (30th Oct), US Fed (30th Oct), BoJ (30th Oct), EZ GDP (30th Oct), ECB (31st Oct), China PMI (31st Oct), EZ CPI (31st Oct)
Trans-Tasman Zone
The AUD and NZD have been whipped around over the past few weeks by a mix of factors such as renewed US/China trade tensions, wobbles in risk assets generated by US credit market concerns, and domestic developments such as the bigger than expected RBNZ rate cut and uptick in Australian unemployment. While the NZD (now ~$0.5740) and AUD (now ~$0.6514) have edged up over the past few days both remain slightly below their respective 1-month averages. Relative outperformance on the cross-rates has also helped the AUD claw back lost ground with gains of ~0.2-0.5% recorded against the EUR, JPY, GBP, NZD, CAD, and CNH over the past 24hrs. However, this comes after a weaker run with crosses such as AUD/EUR (now ~0.5595) lingering near the middle of the lower range occupied the past few months. Elsewhere, AUD/CNH (now ~4.64) is hovering around its 1-year average, and AUD/NZD (now ~1.1345) remains towards the upper end of its cyclical range.
Locally, last weeks Australian jobs report, which showed softer employment growth in September and a rise in unemployment to 4.5%, grabbed a few headlines. The data also saw markets adjust expectations for another RBA interest rate cut over the next few meetings with a move in early November now assigned a ~70% probability. We think trigger happy markets might be factoring in too high a chance of the RBA moving in November given the prospect of Q3 CPI inflation (due 29 October) coming in north of the RBA’s forecasts. Indeed, even when it comes to the labour market, the monthly data is notoriously volatile, and while conditions are cooling broader measures still don’t show a significant loosening with the average of the unemployment rate over Q3 broadly inline with the RBA’s ~4.3% projection (see chart below). We believe a confirmation in the upcoming quarterly CPI that the inflation pulse remains firm could temper the markets enthusiasm about near-term RBA rate cuts, which if realised may give the AUD support.
In our opinion, this should compound the signs of improvement in China’s growth momentum, and thoughts the USD could come under some renewed downward pressure later this week if the delayed US CPI data (due Friday night AEDT) reinforces the case for the US Fed to deliver a series of interest rate cuts over upcoming meetings. As discussed above, we believe US core inflation risks undershooting consensus forecasts because of softer 'services' prices.
AUD & NZD event radar: UK CPI (Weds), JP CPI (Fri), RBA Gov. Bullock (Fri), Global PMIs (Fri), US CPI (Fri), RBA Gov. Bullock (27th Oct), AU CPI (29th Oct), BoC (30th Oct), US Fed (30th Oct), BoJ (30th Oct), EZ GDP (30th Oct), ECB (31st Oct), China PMI (31st Oct), EZ CPI (31st Oct)
AUD levels to watch (support / resistance): 0.6420, 0.6470 / 0.6550, 0.6600
NZD levels to watch (support / resistance): 0.5680, 0.5710 / 0.5770, 0.5810
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events) TUESDAY (21st October) AUD RBA’s Jones Speaks (10:45am) EUR ECB’s Lane Speaks (6pm) EUR ECB’s Escriva Speaks (8:35pm) EUR ECB Pres. Lagarde Speaks (10pm) CAD CPI Inflation (11:30pm) WEDNESDAY (22nd October) EUR ECB’s Kocher Speaks (12:30am) EUR ECB’s Nagel Speaks (9am) JPY Trade Balance (Sep) (10:50am) GBP CPI Inflation (Sep) (5pm) EUR ECB’s Guindos Speaks (10pm) EUR ECB Pres. Lagarde Speaks (11:25pm) THURSDAY (23rd October) SGD CPI Inflation (Sep) (4pm) CAD Retail Sales (Aug) (11:30pm) FRIDAY (24th October) AUD PMIs (Oct P) (9am) JPY CPI Inflation (Sep) (10:30am) AUD RBA Gov. Bullock Speaks (11:05am) JPY PMIs (Oct P) (11:30am) GBP Retail Sales (Sep) (5pm) EUR France PMIs (Oct P) (6:15pm) EUR Germany PMIs (Oct P) (6:30pm) EUR PMIs (Oct P) (7pm) GBP PMIs (Oct P) (7:30pm) USD CPI Inflation (Sep) (11:30pm) SATURDAY (25th October) USD PMIs (Oct P) (12:45am)
About the author
