Market Briefing: US Fed shifting course?

• US data. Solid US retail sales underpinned sentiment. Upshift in US interest rate expectations & weaker GBP boosted the USD. AUD slipped back.

• Macro pulse. Markets toying with the idea the US Fed may hike interest rates. More US/Iran related volatility possible. China data batch due Monday.

Global Trends

• A mixed performance across asset classes overnight, though there was a hint of US outperformance on the back of positive US economic data. US consumer spending (the engine room of the economy) remains resilient in the face of higher gasoline prices with retail sales growing 0.5% in April after a strong showing the month before. Indeed, the ‘control group’ subset, which feeds directly into US GDP, was solid and suggests household consumption (~3/4’s of US GDP) held up in early Q2 after a robust start to the year. Elsewhere, there have been no new major developments with regards to the Middle East conflict, and while President Trump’s visit to China generated a lot of media headlines it hasn't really move the needle with respect to markets.

• In terms of the numbers, European equities rose (EuroStoxx600 +0.8%) and US stocks continued their record-breaking run. The S&P500 (+0.8%) is now up almost ~10% year-to-date or ~19% above its late-March Iran conflict low point. Oil prices remain elevated with brent crude hovering near ~US$106/brl. US bond yields ticked up a bit with the positive US data compounded by ‘hawkish’ comments by US Fed officials. Kansas Fed President Schmid, a known hawk, stated that because the labour market is functioning inflation is a more pressing concern for the US economy. Markets are starting to toy with the idea that the US Fed may shift course and raise interest rates down the track with a hike now almost fully priced in by April 2027. In FX, the USD recouped some lost ground. EUR eased (now ~$1.1671), USD/JPY nudged up (now ~158.36), and GBP underperformed (now ~$1.3403) because of heightened UK political risks. Background moves by a couple of UK politicians have paved a path for potential challenges to PM Starmer job. This is starting to unnerve investors as there are fears replacements for Starmer may result in higher deficits and debt levels. The NZD also slipped back (now ~$0.5912), as did the AUD (now ~$0.7222).

• Looking ahead, markets will continue to watch for any fresh Middle East related news. As mentioned before, the situation remains fluid and the longer the current state of play remains the greater the negative impacts on the global economy. On net, we continue to think that, in the short run, the signs of quickening inflation pressures and resilient US consumer spending should support the USD as markets discount the chance the US Fed might look to move policy settings into more ‘restrictive’ territory.

Global event radar: China Data (18th May), UK CPI (20th May), Global PMIs (21st May), JP CPI (22nd May), RBNZ, (27th May), US PCE (28th May), Germany CPI (29th May)

Trans-Tasman Zone

• The run of positive US data, coupled with some ‘hawkish’ rhetoric from US Fed officials has underpinned US interest rate expectations. Tthe resultant uptick in the USD has exerted a bit of downward pressure on the NZD and AUD (see above). That said, at ~$0.5912 the NZD is still a little above its 1-year average while the AUD (now ~$0.7222) is not that far from its multi-year peak. The AUD also slipped back on most of the major crosses with falls of ~0.1-0.5% recorded against EUR, JPY, NZD, CAD, and CNH the past 24hrs. By contrast, AUD/GBP pushed higher (now ~0.5388) with the GBP underperforming because of UK political risks stemming from the possibility of PM Starmers position being challenged.

• The local economic calendar is limited over the next few sessions with the next major Australian release the monthly jobs report (next Thursday). Ahead of that, the China activity data batch is due (Monday). On balance, we continue to think that for the AUD more near-term headwinds than tailwinds are forming. The AUD has enjoyed a strong run with the jump up since late-December the strongest start to a calendar year since 2009. A key driver has been the upward adjustment in Australian interest rate expectations. We believe the RBA has more work to do and another interest rate hike is probable. By contrast, the interest rate curve is factoring in another ~38bps of RBA tightening by year-end.

• Outcomes compared to expectations matter in markets and for the AUD. With this in mind, we feel it might be difficult for the RBA to be more 'hawkish' than what is already factored in. Moreover, we don’t think the looming slowdown in Australian economic activity because of higher interest rates and fuel costs has been accounted for, neither have the challenges set to be faced by the global/Asian economy from the Middle East conflict. ~80-90% of the energy shipped via the Strait of Hormuz is sent to Asia and other materials important to produce semi-conductors are also being impacted. With positioning (as measured by CFTC futures) ‘net long’, a lot of positives factored in (the AUD is tracking ~3% above our ‘fair value’ estimate), and divergence from yield spreads (see chart below) we see more downside that upside potential for the AUD over the period ahead.

AUD & NZD event radar: China Data (18th May), UK CPI (20th May), AU Jobs (21st May), Global PMIs (21st May), JP CPI (22nd May), RBNZ, (27th May), AU CPI (27th May), US PCE (28th May), Germany CPI (29th May)

AUD levels to watch (support / resistance): 0.7110, 0.7170 / 0.7280, 0.7360

NZD levels to watch (support / resistance): 0.5860, 0.5900 / 0.5970, 0.6020

Market Moves

Peter Dragicevich

Currency Strategist - APAC

peter.dragicevich@corpay.com

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