Market Briefing: Subpar growth weighs on the AUD
The December edition of our Event Radar & Views In A Nutshell pack is here.
Positive vibes. Equities power ahead. USD treads water. AUD underperforms. US data solid but not spectacular overnight.
AUD tumbles. Weaker than expected GDP weighs on AUD. Growth has slowed across the private sector but the level of activity is still high.
Policy impulse. RBA should hold steady next week. Upcoming US jobs report could impact market pricing for a December Fed rate cut.
Global political ructions have continued but the direct market impact has been minimal. In France, as widely expected, a no-confidence vote in Parliament triggered a collapse of the government. France faces a month-end deadline to sort out its budget issues to avert a government shutdown. Equities once again shrugged off the news with the major Eurozone indices rising (EuroStoxx600 +0.4%) and the US markets powering to yet another record high (S&P500 +0.6%, NASDAQ +1.2%). A string of solid but not spectacular US economic data releases, and comments from US Fed Chair Powell, supported sentiment. Data-wise, the ISM services index slipped back more than anticipated, however the gauge remained in ‘expansionary’ territory for the 5th straight month with employment intentions and new orders cooler but still positive. US ADP employment also moderated in November (+146,000) to its 6-month average run-rate.
In terms of the US Fed, Chair Powell noted that the US economy is in “remarkably good shape” right now, and although he stopped short of pushing back on the markets view that another rate cut in December is a high chance (now ~75% priced in) he did reiterate that policymakers can afford to be ‘cautious’ as they shift rates lower towards ‘neutral’. Markets are discounting just over 3 Fed rate cuts over the next year. Chair Powell’s rhetoric was backed up by the latest Fed Beige Book which indicated activity rose in “most” districts and that prices are rising “at a modest pace”.
US bond yields ended the day a little lower with rates falling by ~4-5bps across the curve. This largely unwound the previous days bump up at the long-end of the curve with the benchmark US 10yr yield back near ~4.18%. In FX, the USD index has tread water with EUR hovering just above ~$1.05 and USD/JPY edging a bit higher after an extended pull-back (now ~150.60). The NZD has eased towards its 2024 lows (now ~$0.5860), while the AUD underperformed after yesterday’s weaker than predicted Q3 Australia GDP report raised a few eyebrows and generated a repricing in RBA rate cut assumptions (now ~$0.6437). The monthly US non-farm payrolls report is the next major market signpost (Fri night AEDT). In our opinion, a rebound in US jobs growth after temporary disruptions last month and still low unemployment may see markets trim their near-term US rate cut bets. If realised, this may support the USD which could also benefit from European political developments and the factoring in of US President-elect Trump's platform (see Market Musings: Trump 2.0 & the AUD).
Global event radar: US Jobs (Fri night), RBA Meeting (10th Dec), US CPI (12th Dec), BoC Meeting (12th Dec), ECB Meeting (13th Dec), China Data (16th Dec), FOMC Meeting (19th Dec), BoJ Meeting (19th Dec), BoE Meeting (19th Dec)
AUD Corner
The AUD has been under renewed downward pressure over the past 24hrs on the back of domestic developments. At ~$0.6437 the AUD is tracking near the bottom of its 1-year range with the AUD also losing altitude on most of the major crosses. In contrast to the consolidation in AUD/JPY (now ~96.95, levels last traded in mid-September), the AUD has shed ~0.8-1% against the EUR, GBP, CAD, and CNH. AUD/NZD (now ~1.0985) has fallen by a more modest ~0.4%.
The catalyst for the burst of AUD weakness was yesterday’s GDP figures. The data again showed that higher mortgage rates and elevated prices are constraining private sector activity, with public demand a bright spot. The Australian economy expanded by 0.3% in Q3. As a result, annual growth decelerated to just 0.8%pa. Outside of COVID this is the slowest pace since the early-90’s recession. At first glance the topline result appears grim, but we don’t feel things are as bad as they look. Over the past year net exports and an inventory drawdown have detracted a decent amount from GDP growth. Although GDP per capita continues to go backwards (it has fallen in 8 of the past 9 quarters) the overall level of activity across economy remains above its pre-COVID trend thanks to the jump up in the population and government spending. Indeed, growth in aggregated private and public demand is still positive. This is keeping the labour market in solid shape and there are signs momentum will improve into year-end based on the uptick in consumer confidence, moderating inflation, and income support from government relief measures and tax cuts (see Market Musings: AUD: Temporary GDP hammer blow?).
The data shouldn’t generate a RBA policy response next week, in our opinion. There is an important distinction between growth rates and activity levels that the RBA has been pressing home. While the former has stepped down the latter is still not where it needs to be to be confident core inflation is on a path back down to the RBA’s 2-3% target given lackluster productivity. We think this mix points to the start of a modest and limited RBA easing cycle still being a story for late-H1 2025.
With respect to the AUD, as mentioned before, we feel the enacting of the Trump policy agenda will be USD supportive and this should keep the AUD in the mid-$0.60s over coming quarters (see Market Musings: Trump 2.0 & the AUD). The upcoming US jobs report (Fri night AEDT) poses another temporary near-term downside risk for the AUD. That said, we don’t believe broader fundamentals justify where the AUD is tracking. In our judgement, a fair amount of ‘bad news’ looks discounted with the AUD trading at a ~4 cent discount to our ‘fair value’ estimates. Moreover, over the past decade the AUD has not sustainably traded below where it is (it has only been sub-$0.6450 5% of the time since 2015) because of Australia’s elevated terms of trade and trade position.
AUD event radar: US Jobs (Fri night), RBA Meeting (10th Dec), US CPI (12th Dec), BoC Meeting (12th Dec), AU Jobs (12th Dec), ECB Meeting (13th Dec), China Data (16th Dec), FOMC Meeting (19th Dec), BoJ Meeting (19th Dec), BoE Meeting (19th Dec)
AUD levels to watch (support / resistance): 0.6350, 0.6400 / 0.6520, 0.6570
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
THURSDAY (5th December)
AUD Trade Balance (Oct) (11:30am)
JPY BoJ’s Nakamura Speaks (12:30pm)
EUR Germany Factory Orders (Oct) (6pm)
FRIDAY (6th December)
USD Initial Jobless Claims (12:30am)
GBP BoE’s Greene Speaks (4am)
JPY Labor Cash Earnings (Oct) (10:30am)
EUR Germany Industrial Production (Oct) (6pm)
SATURDAY (7th December)
USD Jobs Report (Nov) (12:30am)
CAD Jobs Report (Nov) (12:30am)
USD Fed’s Bowman Speaks (1:15am)
USD Uni. of Michigan Sentiment (Dec P) (2am)
USD Fed’s Goolsbee Speaks (2:30am)
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