Market Briefing: US CPI the global focus this week
Cross-currents. Stronger data saw bond yields tick up, but spillover into other markets was limited. Equities rose. However, the AUD drifted a little lower.
Budget time. Federal Budget handed down on Tuesday. Some relief measures look set to again be crafted in a way that lowers measured inflation.
Event radar. US CPI & retail sales due this week. Fed Chair Powell speaks. China data released. Locally, wages, & jobs report also scheduled.
Bond yields across Europe and the US edged a little higher on Friday, however the other asset classes were unfazed. US yields rose ~4-5bps across the curve, Germany and UK yields nudged up ~2-3bps, and in Canada yields increased ~7-8bps. Stronger than predicted UK Q1 GDP (+0.6%qoq) and Canadian employment (+90,400), and an uptick in US consumer inflation expectations saw participants curb their enthusiasm about the chances of near-term interest rate relief. Comments by the BoE’s Chief Economist Pill that a heavy focus on a June rate cut would be “ill advised” also played on people’s minds, as did the views of the US Fed’s Bowman who noted that she doesn’t think it will be appropriate to lower rates in 2024. That said, Bowman is at the ‘hawkish’ end of the spectrum and isn’t a voting Fed member this year. Markets are factoring in the first BoE rate cut by August, while the US Fed is priced in to move by November. The ECB looks set to be a front runner with a 90% probability assigned to a move in June.
Despite the lift in yields European equities strengthened with the EuroStoxx50 (+0.6%) closing the week at a cyclical high. The US S&P500 (+0.2%) extended its positive run to 7 straight sessions. Although oil slipped back (WTI crude -1.3%), copper’s upswing (+1.5%) continued. Across FX, the USD consolidated with EUR (now ~$1.0770), USD/JPY (now ~155.70), and GBP (now ~$1.2520) all within +/- 0.1% of where they were compared to this time on Friday. By contrast, AUD (now ~$0.66) and NZD (now ~$0.6020) drifted a touch lower.
This week global focus will be on the US and China. The latest US inflation and retail sales (Weds night AEST) reports are due, as is the monthly China activity data (Fri AEST). Several US Fed officials are also speaking including Vice Chair Jefferson (Mon 11pm AEST) and Chair Powell (Tues night AEST). Data wise, US core CPI is projected to moderate slightly from the higher average monthly run-rate recorded in Q1 as the boost to areas like vehicle insurance and rents wanes. The annual pulse rate of US core inflation is seen slowing to ~3.6%pa, which if realised would be a low since early 2021. As our chart shows, slow-moving shelter/rent prices are a reason overall US CPI inflation isn’t lower. At the same time, US retail sales may also lose momentum as the temporary boost from tax refunds in prior months fades and weakening fundamentals like lower confidence kick in. In our view, this type of mix might revive longer-dated US Fed policy easing bets and weigh on the USD, especially if key Fed officials reiterate that the next rates move will be down not up, and various stimulus measures flowing through the economy underpin an acceleration in activity in China.
Global event radar: Fed Chair Powell Speaks (Weds), US CPI & Retail Sales (Weds), China Data Batch (Fri), Canada CPI (21st May), RBNZ Meeting (22nd May), UK CPI (22nd May), US/European PMIs (23rd May), Japan CPI (24th May), Eurozone CPI (31st May), US PCE Deflator (31st May)
AUD corner
The AUD drifted a little lower on Friday to be back near ~$0.66. As mentioned, stronger than expected data out of the UK and Canada, and uptick in US inflation expectations supported bond yields, and the slight adjustment in yield differentials exerted a bit of downward pressure on some of the AUD crosses with ~0.3% falls versus GBP and CAD the most notable.
It will be a busy week for the AUD given the local and offshore releases scheduled. Intermittent bursts of volatility are anticipated. Locally, the Federal Budget is handed down (Tues night), Q1 wages data is released (Weds), and the monthly labour force report is due (Thurs). In terms of the budget, new policy announcements around subsidies for low-to-middle income households look to be in the pipeline. And while the measures appear set to be once again crafted in a politically savvy way that temporarily reduces measured inflation in the short-term, we don’t think it will be that simple for the economy (and RBA) further out. The savings for households and businesses stemming from things like rental assistance or electricity rebates could be re-circulated back into the economy and this may create more demand-pull inflation down the line than would otherwise be the case. We believe markets could look through the political ‘smoke and mirrors’. On the data front, based on the tightness in the labour market annual wage growth is predicted to hold up around its cyclical highs, an ongoing positive impulse for services inflation. And after some wild swings over the past few months jobs growth in line with the current above average underlying trend pace is projected (mkt +23,700). Although due to the surging population this could still see unemployment nudge up a fraction (mkt ~3.9%).
In our judgement, on net, this could reinforce market pricing looking for the RBA to walk a different path to its peers over the next few quarters. In contrast to the outlook for lower interest rates in most major economies, particularly across Europe, the RBA is generally seen holding rates steady through to early 2025. We agree with this as we have long thought that the RBA would lag its peers in terms of when it starts and how far it goes during the next global easing cycle. The diverging monetary policy expectations in the AUD’s favour may also be reinforced by a slowdown in US core inflation and retail sales (Weds night AEST), while signs momentum in commodity intensive Chinese industrial production and fixed asset investment (Fri AEST) is improving should also be AUD supportive, in our view.
AUD event radar: AU Wages (Weds), Fed Chair Powell Speaks (Weds), US CPI & Retail Sales (Weds), AU Jobs (Thurs), China Data Batch (Fri), Canada CPI (21st May), RBNZ Meeting (22nd May), UK CPI (22nd May), US/European PMIs (23rd May), Japan CPI (24th May), AU Retail Sales (28th May), AU CPI (29th May), Eurozone CPI (31st May), US PCE Deflator (31st May)
AUD levels to watch (support / resistance): 0.6520, 0.6570 / 0.6640, 0.6660
SGD Corner
In line with the consolidation in the USD over the past week, USD/SGD has tread water around ~1.3540. On the crosses, EUR/SGD (now ~1.4590) has drifted a bit higher towards its ~1-year average, while SGD/JPY (now ~115.04) recouped lost ground as the JPY softened after its late-April/early-May recovery.
As discussed, this week in the US inflation and retail sales data is due (Weds night) and several Fed members including Chair Powell speak. In China, the monthly activity data is also released (Fri). In our opinion, a moderation in US core inflation/slowdown in US retail spending after the robust Q1, coupled with a pick up in activity in China could see the USD (and USD/SGD) come under some downward pressure as markets look to factor in more policy easing by the US Fed and growth differentials between the US and rest of the world narrow.
SGD event radar: Fed Chair Powell Speaks (Weds), US CPI & Retail Sales (Weds), China Data Batch (Fri), Singapore CPI (23rd May), US/European PMIs (23rd May), Eurozone CPI (31st May), US PCE Deflator (31st May)
SGD levels to watch (support / resistance): 1.3470, 1.3500 / 1.3570, 1.3600
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
MONDAY (13th May)
AUD Business Conditions (Apr) (11:30am)
NZD 2yr Ahead Inflation Expectations (Q2) (1pm)
USD Fed’s Mester & Jefferson Speak (11pm)
TUESDAY (14th May)
NZD Card Spending (Apr) (8:45am)
NZD Net Migration (Mar) (8:45am)
GBP BoE’s Pill Speaks (5:30pm)
EUR Germany ZEW Survey (May) (7pm)
AUD Federal Government Budget (7:30pm)
USD NFIB Small Business Index (Apr) (8pm)
USD PPI Inflation (Apr) (10:30pm)
WEDNESDAY (15th May)
USD Fed Chair Powell Speaks (12am)
EUR ECB’s Knot Speaks (12am)
AUD Wage Price Index (Q1) (11:30am)
EUR GDP (Q1 P) (7pm) EUR Industrial Production (Mar) (7pm)
EUR ECB’s Villeroy Speaks (7pm)
USD Empire Manufacturing (May) (10:30pm)
USD CPI Inflation (May) (10:30pm)
USD Retail Sales (Apr) (10:30pm)
THURSDAY (16th May)
USD NAHB Housing Index (May) (12am)
USD Fed’s Kashkari Speaks (2am)
AUD RBA’s Hunter Speaks (9:40am)
JPY GDP (Q1) (9:50am)
AUD Jobs Report (Apr) (11:30am)
GBP Jobs/Wages (Mar/Apr) (4pm)
EUR ECB’s Panetta Speaks (7pm)
GBP BoE’s Greene Speaks (9pm)
EUR ECB’s Villeroy Speaks (10:15pm)
USD Housing Starts/Building Permits (Apr) (10:30pm)
USD Philly Fed Outlook (May) (10:30pm)
USD industrial Production (Apr) (11:15pm)
FRIDAY (17th May)
USD Fed’s Harker Speaks (12:30am)
USD Fed’s Mester Speaks (2am)
USD Fed’s Bostic Speaks (5:50am)
CNY Industrial Production (Apr) (12pm)
CNY Retail Sales (Apr) (12pm)
CNY Fixed Asset Investment (Apr) (12pm)
EUR ECB’s Vasle Speaks (5pm)
EUR ECB’s Vujcic Speaks (5:30pm)
GBP BoE’s Mann Speaks (6pm)
EUR CPI Inflation (Apr F) (7pm)
EUR ECB’s Vasle, Holzmann & Kazaks Speak (10:30pm)
SATURDAY (18th May)
USD Leading Index (Apr) (12am)
*Note, all times/dates provided are AEST