Market Briefing: Sticky inflation risks

CalendarFebruary 22, 2024
  • Consolidation. Bond yields reverse but FX markets little changed. US Fed minutes don't move the needle given markets have already repriced.

  • Fed speak. Eurozone/UK PMIs tonight. Several Fed members speak tomorrow. A near-term cut is off the table, but is a recalibration still likely later this year?

  • AU wages. Annual growth faster than expected. Wages feed into services inflation. We see the RBA lagging its peers when the next easing cycle unfolds.   

US equities ticked up near the close (S&P500 +0.1%) with upbeat comments/results from Nvidia boosting sentiment. Nvidia is at the center of the AI frenzy that has helped the US stockmarket power ahead (this one megacap is responsible for ~1/3 of the NASDAQ’s gains over the past year). Elsewhere, Chinese equities were up strongly yesterday. The Hang Seng China Enterprises index closed ~2% higher with policymakers unveiling more measures to prop up markets. This time around authorities announced a clamp down on short selling and trading by quant funds which they believe have been a source of volatility. As we noted previously, steps to bolster the stockmarket can positively impact China’s economy via confidence and wealth effects, while capital inflows also tend to be a CNH tailwind.

Bonds reversed course with yields higher across Europe (UK and German rates rose ~7-8bps across their respective curves) and the US. US 2yr (now 4.65%) and 10yr (now 4.32%) yields increased ~5bps, unwinding yesterday’s dip. Data flow was limited with the now dated minutes of the late-January US FOMC meeting the only release of note. The minutes were broadly in line with recent Fed rhetoric. While Fed officials think the funds rate is “likely at its peak”, most also noted the risks of cutting rates too quickly with various sources of (upside) inflation risk flagged. This was also at the heart of the message from the Fed’s Bowman and Barkin overnight with the former stating the time for cuts is “certainly not now” and the latter concerned the help to inflation from falling goods prices may fade.

FX participants have heard this before. And outcomes relative to expectations drive markets. US interest rates have adjusted meaningfully over recent weeks. As our chart shows, there is now limited chance of a Fed rate cut priced in by March (it had been as high as a ~90% probability at the turn of the year). The first Fed rate reduction is not discounted until July, with ~90bps of rate cuts factored in over 2024 (down from a peak of ~170bps in mid-January). This helps explain the limited FX moves with the USD index, on net, little changed. EUR is hovering near ~$1.0820, with USD/JPY just above 150, and GBP at ~$1.2635. USD/SGD is down around ~1.3435 and the AUD consolidated around its 100-day moving average (~$0.6550).

Tonight, February readings of the Eurozone (8pm AEDT) and UK (8:30pm AEDT) business PMIs will be in focus. Signs growth momentum is improving may give EUR and GBP some support ahead of several speeches by Fed officials (Jefferson (Fri 2am AEDT), Bowman (Fri 5am AEDT), Harket (Fri 6am AEDT), Cook & Kashkari (Fri 9am AEDT), and Waller (Fri 11:35am AEDT)). While a repeat of the view that a near-term Fed rate cut shouldn’t cause a stir, in our opinion, indications broader trends still suggest a policy recalibration later in the year is likely may see the USD lose ground.

Global event radar: Eurozone/UK PMIs (Today), Japan CPI (27th Feb), RBNZ Meeting (28th Feb), China PMIs (29th Feb), US PCE Deflator (1st Mar), Eurozone CPI (1st Mar), US ISM (2nd Mar).

AUD corner

Steady as she goes for the AUD with the currency (now ~$0.6550) oscillating in a ~0.6% range near its 100-day moving average over the past 24hrs. As discussed above, the minutes of the last US FOMC meeting had limited market impact given US interest rate expectations have repriced sharply over recent weeks to reflect the more up to date economic information and central bank rhetoric. The AUD also consolidated on the crosses with modest falls of ~0.2% recorded against the EUR, GBP, NZD, CAD, and CNH.

Locally, Q4 wage data was released yesterday. The WPI ticked up a little more than anticipated, rising by 4.2%pa (the market and RBA was penciling in ~4.1%pa). This is the fastest annual wage growth since early-2009. The lagged impacts from very tight labour market conditions continue to underpin private sector wages with almost all sectors now running above their respective long-run averages, while the end of caps and freezes has seen public sector wages step up. Wages are a major input into services inflation. And although the annual run rate may not lift any further, based on the high usage of multi-year Enterprise Bargaining Agreements in Australia elevated wage pressures could persist well into 2024 (~1/3 of jobs are tied to EBA’s, many of which will continue to roll over this year). As our chart shows, a further loosening in labour market conditions is needed for wage growth to slow to where it needs to be for inflation to be back at target, and until that is unfolding we expect the RBA to hold rates in ‘restrictive’ territory.

We think Australia’s sticky wages/services inflation pulse should see the RBA remain on a different path to its peers with the bank predicted to lag in terms of when rate cuts start and/or how many are delivered in the next cycle. As a result, we see short-dated yield differentials trending in the AUD’s favour over the medium-term. In our judgement, this, along with the stimulus injections in China and improved growth momentum, coupled with the valuation support that has opened up (the AUD remains ~2 cents under the average ‘fair value’ estimate from our suite of models), and the typically more positive seasonality over March/April could see the AUD continue to recover lost ground over the period ahead.

AUD event radar: Eurozone/UK PMIs (Today), Japan CPI (27th Feb), RBNZ Meeting (28th Feb), AU CPI (28th Feb), China PMIs (29th Feb), US PCE Deflator (1st Mar), Eurozone CPI (1st Mar), US ISM (2nd Mar).

AUD levels to watch (support / resistance): 0.6440, 0.6490 / 0.6595, 0.6620

FX Moves

Peter Dragicevich

Currency Strategist - APAC

Upcoming Events

THURSDAY (22nd February)

JPY PMIs (Feb P) (11:30am)

GBP BoE’s Greene Speaks (5:30pm)

EUR France PMIs (Feb P) (7:15pm)

EUR Germany PMIs (Feb P) (7:30pm)

EUR PMIs (Feb P) (8pm)

GBP PMIs (Feb P) (8:30pm)

EUR CPI Inflation (Jan F) (9pm)

EUR ECB Accounts (Jan Meeting) (11:30pm)

FRIDAY (23rd February)

CAD Retail Sales (Dec) (12:30am)

USD Initial Jobless Claims (12:30am)

USD Chicago Fed Index (Jan) (12:30am)

USD PMIs (Feb P) (1:45am)

USD Existing Home Sales (Jan) (2am)

USD Fed’s Jefferson Speaks (2am)

USD Fed’s Bowman Speaks (5am)

USD Fed’s Harker Speaks (6am)

NZD Retail Sales Volumes (Q4) (8:45am)

USD Fed’s Cook & Kashkari Speak (9am)

USD Fed’s Waller Speaks (11:35am)

SGD CPI Inflation (Jan) (4pm)

GBP BoE’s Greene Speaks (6:30pm)

EUR Germany IFO (Feb) (8pm)

EUR ECB’s Schnabel Speaks (8:20pm)

EUR ECB’s Nagel Speaks (9pm)

SATURDAY (24th February)

EUR ECB’s Schnabel Speaks (12am)

*Note, all times/dates provided are AEDT


Peter Dragicevich

Peter Dragicevich

Currency Strategist - APAC

Peter analyses and forecasts global macroeconomic trends to draw out possible implications for interest rates, commodity pricing, and the FX markets for Australia and across Asia.

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