Market Briefing: Shifting Fed views
Positive vibes. Global equities pushed higher with markets factoring in a series of US Fed rate cuts. USD softer. AUD & NZD edge a little higher.
AU jobs. Volatile employment report released today. Labour demand is cooling. Will the AU jobs data rebound or is a new (weaker) trend forming?
US data. Producer prices & jobless claims out tonight. US retail sales & import prices due Friday. US Fed expectations (& the USD) may be impacted.
Global Trends
There was limited top tier economic data released overnight. As a result, market sentiment was driven by a few US Fed related headlines. US Treasury Secretary Bessent continued his open push for the US Fed to move aggressively by stating the policy rate ought to be at least 150bps below where it is. He also mentioned Fed officials may have cut rates in July if they had been aware of the downward revisions to the US jobs data. An interesting assessment given others in the Administration have openly stated that the jobs figures, particularly the benchmark revisions, weren’t a true reflection of the state of play. Elsewhere, the Fed’s Goolsbee (a voter in 2025) said there are going to be some ‘live’ meetings coming up as policymakers try to interpret the mixed signals, though he countered this by noting the rise in services inflation is something that needs to be looked at as it could mean they have a “hard time getting back to 2%pa”.
Nevertheless, myopic markets have bolstered their US Fed rate cut expectations, with a small chance of a 50bp move in September now discounted. A stream of interest rate reductions is baked in with markets factoring in 5 Fed rate cuts by next September. The adjustment exerted a little downward pressure on bond yields with US rates ~6bps lower across the curve. The benchmark US 10yr yield (now ~4.23%) is tracking near the bottom of its 3-month range. By contrast, global equities extended their upswing. The MSCI World Index touched an all-time high, as did Japan’s Nikkei 225 and US S&P500 (+0.3% overnight). In FX, the pullback in US yields weighed a bit on the USD with EUR (the main USD alternative) edging over ~$1.17 and USD/JPY drifting down towards ~147.30. The NZD (now ~$0.5975) and AUD (now ~$0.6544) ticked up over the past 24hrs.
The US data flow picks up over the next 48hrs with Producer Price Inflation and Initial jobless claims out tonight (10:30pm AEST) while retail sales, import prices, and industrial production figures are due on Friday. We continue to have a negative USD bias over the medium-term as higher import prices slow down activity which in turn sees the US Fed steadily lower interest rates. That said, in the short-run, particularly with markets now toying with the idea of a 50bp Fed cut in September, we believe the USD could bounce back if the incoming US data (particularly PPI and retail sales) exceeds downbeat predictions. If realised, this might see markets pare back their aggressive Fed easing bets.
Global event radar: China Data (Fri), US Retail Sales (Fri), RBNZ Meeting (20th Aug), Global PMIs (21st Aug), US PCE Deflator (29th Aug)
Trans-Tasman Zone
The softer USD and upbeat tone across global equities has given the AUD and NZD a little boost over the past 24hrs (see above). That said, at ~$0.6544 the AUD is not far from its multi-month average. It is a similar story for the NZD (now ~$0.5975) with recent trading ranges in both currencies a bit tighter than historical norms. On the crosses, the AUD has continued to put in a mixed performance, a further indication moves in AUD/USD are being driven by the USD side of the equation. The AUD eased back ~0.1-0.3% versus the JPY, GBP and NZD, while it edged up ~0.1% versus the CAD and CNH.
Data wise, Q2 Australian wages data released yesterday was slightly firmer than predicted with the WPI holding steady at 3.4%pa. Strength in public sector wages was a factor as backdated pay rises flowed through. Wages is backward looking. The slack starting to appear in the Australian jobs market points to wages slowing over coming quarters, which in turn should help guide inflation lower and this can see the RBA deliver a few more rate cuts this cycle, in our opinion. Today, attention will be on the monthly jobs report (11:30am AEST). The data is notoriously volatile. Over the past year employment changes have ranged between -53,000 and +89,000. Consensus is looking for a 25,000 rise in employment in July and for unemployment to dip to 4.2%.
In our opinion, there is a risk the jobs data underwhelms. Forward-looking labour demand indicators such as job ads and hiring intentions have stepped down, suggesting the typical rebound after a weak print the month before may not materialise. As our chart shows, monthly employment has come in below expectations in 4 of the past 5 months, another sign labour conditions are cooling. If realised, we feel a softer report could take a bit of heat out of the AUD as it could boost RBA rate cut expectations. Likewise, stronger than predicted US data (such as the PPI 10:30pm AEST) might see markets trim their aggressive Fed rate cut expectations which gives the beleaguered USD a helping hand.
However, we continue to think that this short-run choppiness shouldn’t be sustained and that over the longer-run (i.e. next 6-12 months) the AUD is poised to climb higher. We expect the AUD to be supported by a cyclical improvement in Australia’s growth pulse. Added to that, steps by authorities in China to offset export sector headwinds via stimulus aimed at underpinning domestic activity (areas Australia’s key exports are plugged into) should be an AUD tailwind. As should a weaker USD which we believe is likely to unfold as higher import prices ripple through the US economy and the US Fed re-starts its interest rate cutting cycle later this year.
AUD & NZD event radar: AU Jobs (Today), China Data (Fri), US Retail Sales (Fri), RBNZ Meeting (20th Aug), Global PMIs (21st Aug), AU CPI (27th Aug)
AUD levels to watch (support / resistance): 0.6450, 0.6510 / 0.6560, 0.6600
NZD levels to watch (support / resistance): 0.5840, 0.5920 / 0.6000, 0.6040
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
THURSDAY (14th August) AUD Jobs Report (July) (11:30am) GBP GDP (Q2) (4pm) EUR Industrial Production (June) (7pm) USD PPI Inflation (July) (10:30pm) USD Initial Jobless Claims (10:30pm)
FRIDAY (15th August) USD Fed’s Barkin Speaks (4am) NZD Net Migration (June) (8:45am) 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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