Market Briefing: Shifting Fed rate expectations
Fed jolt. Dovish tilt by Fed Chair Powell boosted risk sentiment on Friday. US equities rose, while bond yields & the USD declined. AUD rebounded.
Fed pricing. Odds of a Fed move in September increased. A steady stream of Fed rate cuts expected over the next 12-18 months.
Event radar. In Australia monthly CPI inflation is due (Weds). In the US focus will be on a speech by the Fed's Waller & the PCE deflator (both Fri).
Global Trends
There was a US Fed induced positive jolt across risk markets on Friday. The speech by Chair Powell at the annual Jackson Hole event had a ‘dovish’ tilt with the worsening in the downside risks in the US jobs market front of mind. According to Chair Powell given policy is in “restrictive territory, the baseline outlook and the shifting balance of risks” the dynamics “may warrant adjusting our policy stance”, particularly as the impact on inflation from tariffs is expected to be short-lived. The hefty downward revisions in US jobs growth in the last employment report have clearly caused a bit of a stir at the Fed, though we would remind readers that the Fed’s baseline view for several months has been for a couple of rate cuts to come through over H2 2025 and more to be delivered in 2026. Hence comments that the policy stance may be adjusted aren’t exactly new.
While Chair Powell didn’t explicitly call out the mid-September meeting as the potential point when the Fed will restart its rate cutting cycle the comments mean it will be on the table. Markets are assigning a ~82% chance of a move by the Fed in September with 54bps of cuts factored in by year-end and 105bps discounted by next June. This is up from 48bps and 95bps respectively prior to Chair Powell’s speech. The adjustment in Fed expectations flowed through to US bond yields with rates declining by ~7-10bps across the curve. A sizeable move on the day but the benchmark US 10yr yield (now ~4.25%) is only back where it was tracking a week ago. The prospect of looser monetary policy saw US equities rise with the S&P500 (+1.5%) around record highs. In FX, the USD index gave back some ground with EUR (now ~$1.1722) strengthening by ~1% and USD/JPY falling to ~146.85. The NZD rose (now ~$0.5870) as did the AUD (now ~$0.6494), though the moves only put the AUD back where it was trading last Tuesday.
In the US the focal points this week should be Fed Governor Waller's speech on the outlook and the monthly PCE deflator (the Fed’s preferred inflation gauge) (both Friday). As seen over the past few weeks US Fed expectations and the USD have been whipped around by the incoming data. With this in mind and based on where market odds for a Fed move in September are now sitting, we think signs of resilience in the US economy/uptick in inflation might give the USD a bit of renewed short-term support later this week.
Global event radar: US PCE Deflator (Fri), China PMIs (31st Aug), EZ CPI (2nd Sep), US ISM (3rd Sep), US Jobs (5th Sep)
Trans-Tasman Zone
The ‘dovish’ market interpretation of Fed Chair Powell’s speech and repricing in US rate cut expectations boosted risk sentiment on Friday, with the weaker USD giving the AUD and NZD a helping hand (see above). That said, while the moves over the day seem large (i.e. +1.1% for AUD and +0.9% for the NZD) they only partially unwound falls that came through earlier in the week. Indeed, the NZD (now ~$0.5871) still depreciated over the week (its 3rd decline in 4 weeks) with the RBNZ rate cut and signals that more may follow more of a negative jolt. While the AUD (now ~$0.6494) has risen it is only back where it was trading last Tuesday and is broadly inline with its ~1-year average. On the crosses the positive backdrop helped the AUD outperform on Friday with gains of ~0.1-0.3% recorded against EUR, JPY, GBP, and NZD, with an even bigger move posted versus CNH (+1%).
This week in Australia the monthly CPI indicator for July is released (Wednesday). There is a wide range of estimates for where annual inflation could land this month due to various push-pull forces such as base effects related to the end of some electricity subsidies. We think that on net the CPI data might show an uptick in headline and core inflation. If realised, this would reinforce our long held view (and the market’s assumption) that the RBA may continue to proceed gradually in its interest rate cutting cycle. In our opinion, a more cautious approach from the RBA, coupled with commodity intensive stimulus measures in China should, over time, give the AUD a boost, particularly on some of the crosses such as AUD/EUR and AUD/NZD which are tracking below our model estimates.
In terms of AUD/USD we believe domestic and offshore cross-currents could generate intermittent bursts of volatility this week. As discussed above, the focal points in the US will be a speech by Fed Governor Waller and US PCE deflator (both Friday). In our view, a combo of firmer Australian and US inflation might cancel each other out with the AUD likely to continue to oscillate around its 1-year average (~$0.6460) near-term.
AUD & NZD event radar: AU CPI (Weds), US PCE Deflator (Fri), China PMIs (31st Aug), EZ CPI (2nd Sep), US ISM (3rd Sep), AU GDP (3rd Sep), RBA Gov. Bullock Speaks (3rd Sep), US Jobs (5th Sep)
AUD levels to watch (support / resistance): 0.6380, 0.6430 / 0.6510, 0.6550
NZD levels to watch (support / resistance): 0.5780, 0.5830 / 0.5920, 0.5970
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
MONDAY (25th August) SGD CPI Inflation (July) (3pm) EUR Germany IFO (Aug) (6pm) USD Chicago Fed Index (July) (10:30pm)
TUESDAY (26th August) USD Dallas Fed Index (Aug) (12:30am) USD Fed’s Logan Speaks (5:15am) USD Fed’s Williams Speaks (9:15am) AUD RBA Minutes (11:30am) USD Fed’s Barkin Speaks (2pm) EUR ECB’s Villeroy Speaks (8:45pm) USD Durable Goods Orders (July P) (10:30pm) USD House Prices (June) (11pm)
WEDNESDAY (27th August) USD Richmond Fed Index (Aug) (12am) USD Consumer Confidence (Aug) (12am) AUD CPI Inflation – Monthly (July) (11:30am) AUD Construction Work (Q2) (11:30am) USD Fed’s Barkin Speaks (2pm)
THURSDAY (28th August) NZD Filled Jobs (July) (8:45am) NZD Business Confidence (Aug) (11am) AUD CAPEX (Q2) (11:30am) JPY BoJ’s Nakagawa Speaks (11:30am) EUR ECB’s Rehn Speaks (6pm) EUR Confidence Indicators (Aug) (7pm) EUR ECB Meeting Minutes (9:30pm) USD Initial Jobless Claims (10:30pm) USD GDP (Q2 S) (10:30pm)
FRIDAY (29th August) USD Fed’s Waller Speaks (8am) NZD Consumer Confidence (Aug) (8am) JPY Tokyo CPI Inflation (Aug) (9:30am) JPY Industrial Production (July P) (9:50am) EUR France CPI (Aug P) (4:45pm) EUR Spain CPI (Aug P) (5pm) EUR ECB’s Guindos Speaks (7pm) EUR Germany CPI (Aug P) (10pm) CAD GDP (Q2) (10:30pm) USD PCE Deflator (July) (10:30pm) USD Trade Balance (July) (10:30pm) USD Chicago PMI (Aug) (11:45pm)
*Note, all times/dates provided are AEST
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