Market Briefing: US Fed political pressure
Holding on. US equities ticked higher overnight, while US yields & the USD slipped back a little. AUD hovering just above its 1-year average.
Fed news. Steps by Pres. Trump to fire Fed Gov. Cook in focus yesterday. Fed independence continues to be challenged. Will markets remain calm?
AU inflation. Monthly CPI indicator due today. Incomplete data at this stage of quarter. Base effects related to elec. subsidies may see CPI re-accelerate.
Global Trends
Modest moves across markets overnight with participants focused on unfolding developments regarding the US Federal Reserve. US equities unwound yesterday’s small falls with the S&P500 (+0.4%) back near where it closed last week. US bond yields ticked lower with the policy expectations driven 2yr yield leading the way (-4bps to 3.68%). In FX, the USD index eased a little with EUR nudging higher (now ~$1.1645) and USD/JPY (now ~147.40) consolidated under its 1-year average. The AUD (now ~$0.6496) and NZD (now ~$0.5860) also drifted a fraction higher.
With respect to the US Fed, yesterday President Trump announced he is removing a member of the Board of Governors, Lisa Cook, amid allegations of mortgage fraud. Governor Cook indicated she won’t step aside and looks set to fight the decision in the courts with the extent of the President’s “for cause” firing power largely untested. The move, if upheld by the courts, would open another spot on the Fed’s Board of Governors which President Trump could look to fill with someone sympathetic to his low interest rate bias, much like he has done with his nominated replacement of another member who resigned recently. These steps, reports the Trump Administration is weighing options to exert influence on the Federal Reserve's regional banks, and ongoing public pressure on Fed Chair Powell may challenge the central banks independence, a critical pillar which helps achieve price/inflation stability. Thus far, markets generally look to be taking things in their stride, though a closer look under the hood in some areas suggests concerns may be beginning to bubble to the surface. The spread between long-end and short-end US bonds yields is widening. The gap between the US 30yr and 2yr yields is the now ~124bps, the top of its multi-year range, as a greater political/inflation risk premium is factored in.
In the near-term, in addition to more US Fed headlines, the focus in the US will be Fed Governor Waller's speech and the monthly PCE deflator (the Fed’s preferred inflation gauge) (both Friday). Given where market odds for a Fed move in September now sit (~87% chance of a rate cut), we think an uptick in inflation might give the USD a bit of renewed short-term support. That said, over the longer-run (i.e. the next 3-12 months) we continue to expect the USD to lose ground with the weaker growth outlook and prospect for US Fed interest rate cuts compounded by the potential politicization of US institutions which in turn might unnerve investors and reduce demand/inflows into US financial assets.
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 softer USD, and still relatively upbeat risk sentiment (as illustrated by the US S&P500 trading near record highs) in the wake of the ‘dovish’ tilt by Fed Chair Powell at last Friday’s Jackson Hole speech continues to support the AUD and NZD (see above). At ~$0.6496 the AUD is hovering just north of its 1-year average while the NZD (now ~$0.5860) has ticked up from last week’s post RBNZ rate cut lows. By contrast, the AUD has tread water on the crosses over the past 24hrs with little net movement coming through against the EUR, JPY, GBP, NZD, or CAD. By contrast, AUD/CNH ticked up slightly (+0.2%) and is close to its ~1-year average.
Yesterday the minutes of the August RBA meeting were released and the tone was like Governor Bullock’s post meeting press conference. According to the minutes “some further reduction in the cash rate over the coming year” is likely to be required, with the pace “determined by the incoming data on a meeting-by-meeting basis”. The comments support our long held view that the RBA, which lagged its global peers on the way up, should continue to proceed gradually in its interest rate cutting cycle. We think the next RBA rate cut could come through in November by which time the Board will have more information about the state of the global economy, domestic labour market trends, and the quarterly inflation pulse.
Today, the monthly CPI indicator for July is released (11:30am AEST). Given the data captures the first month in the new quarter, the incomplete CPI indicator will be more heavily skewed towards ‘goods’ rather than ‘services’ prices. 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 balance the CPI data might show faster headline and core inflation. If realised, this could reinforce expectations looking for the RBA to maintain its cautious/gradual easing cycle. In our judgment, a more measured 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 may generate more intermittent bursts of volatility over the near-term with the AUD likely to continue to oscillate not that far from its 1-year average (~$0.6460).
AUD & NZD event radar: AU CPI (Today), 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): 0.6430, 0.6470 / 0.6515, 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
WEDNESDAY (27th August) 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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