Australian dollar sucked into American inflation black hole

See the latest Australian dollar analysis here:

Macro Afternoon

DXY continues to push to new twenty-year highs as EUR heads for parity:

AUD was at new post-COVID lows again:

Despite a better day for CNY, which won’t last:

If oil swings higher then expect a global recession for sure. If it breaks lower then a soft landing is still an outside chance:

Metals did better:

And miners:

EM stocks and junk held on:

The US curve flattened appreciably:

And stocks tanked:

Westpac has the wrap:

Event Wrap

US CPI in April was stronger than expected, headline inflation at +0.3%m/m and +8.3%y/y (vs est. +0.2%m/m and 8.1%y/y, prior 8.5%y/y). Core inflation rose +0.6%m/m and +6.2%y/y (est. +0.4%m/m and 6.0%y/y, prior 6.5%y/y). While the pullback in annual inflation from last month suggests that a peak has been seen, the breadth of rising components raises concerns that inflation pressures will be slow to subside.

A flurry of ECB speakers all carried the same message: inflation pressures warrant the end of current accommodation. The ECB looks to end QE at its June meeting, when it has updated forecasts, and start raising rates early in Q3. Lagarde said that inflation was likely to be at (or above) target through their forecast period, strengthening the case for ending accommodative policy. All speakers (including Villeroy, Nagel, and Elderson) stressed that policy change would be gradual, measured and data dependent.

Event Outlook

Aust: MI inflation expectations will likely remain elevated, mirroring the 5.1%yr lift in the Q1 CPI. The preliminary estimate for April’s overseas arrivals and departures will provide insight into whether the newly found momentum in overseas travel has sustained.

NZ: Higher mortgage rates are set to continue weighing on REINZ house sales and prices in April. The minimum wage lift will likely see food prices rise in April (Westpac f/c: 0.8%). Meanwhile, net migration flows should remain subdued in March but it should strengthen over the coming months as travel restrictions continue to relax. The RBNZ’s inflation expectations for Q2 are set to rise sharply across near-term horizons following the strong Q1 inflation result.

Japan: The current account balance is expected to remain in surplus in March on account of strong primary income and a smaller trader gap (market f/c: ¥1737.5bn).

UK: GDP growth is anticipated to reflect a decent recovery in Q1 although the Bank of England warns of a sharp slowing in activity over mid-year (market f/c: 1.0%). Below average trade volumes are likely to sustain the trade deficit in March (market f/c: -£7800mn).

US: Supply issues should continue to support producer prices in April (market f/c: 0.5%) and initial jobless claims are set to remain at a very low level (market f/c: 192k).

US inflation has peaked but remained stronger than expected. BofA:

Headline CPI prices simmered down to a 0.3% (0.33% unrounded) mom clip, though this was better than expectations for a 0.2% gain. Energy prices slid 2.7% mom as a pullback in retail gasoline prices led to a 5.4% drop in energy commodities, which was partially offset by a 1.3% increase in energy services. Food stayed hot as food at home climbed 1.0% mom and food away from home rose 0.6% mom. Coupled with negative base effects, yoy headline CPI slowed to 8.3% from 8.5% in March, with the latter month likely reflecting the peak in inflation.

Core CPI was an even stronger beat, rising 0.6% (0.57% unrounded) mom versus consensus at 0.4%. This led to the yoy rate dropping to 6.2% from 6.5%, reflecting the aforementioned unfavorable base effects. One of the main drivers of the upside surprise was a record 18.6% increase in airline fares, which added 13bp to core CPI alone and reflects a boost from reopening pressures. This contributed to a broader transportation services increase of 3.1% mom, with car truck rental and motor vehicle insurance prices also both rising 0.8% mom. Adding to the reopening theme, lodging gained 1.7% mom.

Even outside of the reopening-related categories, which we view as positive noise this month, there were notable broad based gains across services amid tight labor markets and accelerating wages. OER rose 0.45% mom and rent of primary residence accelerated to 0.56% mom. Medical care and other personal services both gained 0.5% mom, and recreation was up 0.4% mom. Water/sewer/trash and education/communication services both rebounded from negative readings in March to 0.3% mom and 0.2%, respectively.

Core goods was more mixed. On one hand, new cars rose 1.1%—a new methodology update likely contributed to a stronger reading this month, see That new car smell— household furnishings/supplies and recreation goods both rose 0.5%, alcohol was up 0.4% mom, other goods rose 0.3% mom, and medical goods edged up 0.1% mom. On the other hand, education/communication collapsed 2.6% mom, apparel slid 0.8% mom, and used cars fell 0.4% mom. There have been mixed signs of progress on supply chains in the US, which can help explain the more mixed readings across goods. Looking ahead, the Russia/Ukraine conflict and China lockdowns remains risks to commodity prices and global supply chain conditions, which could lead to further choppiness. On net, we expect fairly strong core goods inflation through this year, around 5% by yearend.

Overall, this was a noisy report given the move in airline fares, so some of the strength should be faded. That said, underlying inflation pressures remain elevated—we recommend keeping an eye out on trimmed-mean/median later this morning—which should leave the Fed comfortable maintaining their front-loaded rate hiking path. We still view the risks of a 75bp rate hike as low given the noise, but clearly this report adds to the debate on the margin.

The question is, will inflation come down fast enough to sink yields and lift stocks before the growth scare sinks stocks anyway.

At this stage, the answer looks like no. If so, AUD is still on a hiding to nothing.

Houses and Holes

Comments

  1. AUD hasn’t really fallen much, still 69s. The carnage in the sharemarket especially tech was from the aggressive & steep rise in bond yields.
    We’ve finished the capitulation in bonds
    We will see bond yields fall as US economy slows considerably 3.20 should be the high US 10 year & 3.60 the high Aust 10 year – the inflation & rising yields fear is subsiding.
    Equities should find support over the next few days.
    Think you’ll see 80 on the AUD before 60, commodities should start running again

    Think we are 4 to 6 weeks away from the FED PIVOT…. But the market will sniff it out first – the smart ones are already preparing for THE PIVOT

    FED aren’t too far away from easing or pausing. US economy is going off a cliff edge, mortgage rates doubled from 2.5 to nearly 6% & gasoline double & high food prices

    US likely already in recession should see negative Q2 GDP

    Wait until the Fed pivot narrative starts

    Woohaaa

    AUD will fly through 70s towards 80c
    The FED isn’t going to let this fall apart JP will turn 180 without a blink
    Everyone who thinks the FED is trying to crash everything because it suits their portfolio position will be disappointed
    Don’t fight the fed !!!!!!
    Remember most of their talk has been jaw boning, they slowed the US economy without actually raising the FFR
    if you look at sentiment indicators
    Nasdaq stocks above 200 day moving average now at 15% (indicate bottoms)
    AAII BULL BEARS most bearish readings since 09 low
    INV MAN index at extreme pessimism

    Anyway it’s worth looking at the data objectively rather than cheering on what you’d like to see happen

    Put your bias in your back pocket

    Many indicators are pointing to a reversal

    FED maybe isn’t far away from the rescue again – what a manipulated world we live in

    • 100% if the Fed is ready to pivot. I know they’re mumbling about soft landing under their breath but the inflation number still needs to come down more and 100bps hikes is still locked for June/July.

      Only a market crash can prevent that now.

      And welcome back!

      • Muttafukaburrasaurus.MEMBER

        The acting FED chairman (remains unconfirmed) will do as he’s told. It’s not different this time, but it’s not Powell in the driver’s seat either. Politically Dems will happily run over Wall Street. Or do whatever they can to appear too.
        Gets interesting post mid-terms & CCP dicataorathon.

    • Who is the Fed operating for the benefit of?
      Is runaway inflation the “Great reset” play, which clearly involves crashing markets and cleaning up in the aftermath.
      “The recession we had to have” > “The depression we had to have”
      Actions are not done without first creating a narrative (WMD anyone?)

  2. Grand Funk RailroadMEMBER

    My read is roughly the below.

    The Fed tightens and the AUD will increasingly drop vis the USD subject to how much the RBA actually tightens and how much spending an incoming ALP government tees off with.

    If an incoming government spends and the RBA tightens the AUD will tend to hold with a tightening Fed vis the USD and may even go a touch higher. But the tightening Fed is dealing with real inflation whereas the RBA is dealing with faux inflation propelled by a decades worth of low wages growth and a population ponzi in an economy with almost its entire being shoved up its own jaxi, and amongst the most heavily indebted people on the planet. Any real rate rise in Australia not offset by significant placement of cash into Australian wallets by government will lead to an asset price crash which will result in NPLs going stratospheric on banks balance sheets which the RBA would need to fund via the TFF.

    The other take is global commodity prices – Australia being nothing but a generator of gas coal iron ore gold and some grains/meat as far as the rest of the world (mainly China) is concerned. The US Fed lifting rates there to deal with genuine US inflation will suck the wind out of commodity prices, as it makles USD more expensive all round and buyers find it more expensive to get the same amount they got last month. This is being offset by Russia and Ukraine which appears to be baking in a global food shortage (particularly in the middle east) which will ensure top prices for Australian grains and probably beef and lamb products too. Russia and Ukraine (and the EU) are doing a superb job of ensuring that Europe will have a major energy crisis in the lead up to the Northern winter (October/November) so that too should keep Australian gas price receipts ticking over nicely at least to year end as Europe looks for non Russian gas and the people it gets that from look at Australian and buy up big.

    So provided they hold up then there will be ongoing current account benefits for the Australian government to rake off – it just needs to political cojones and the data backed narrative to shove those proceeds into peoples pockets with a view to lowering debt or otherwise getting people to spend. But if they fail (and my money is sadly on this) then there will be likelihood of minor giveaways for the already spending (tax cuts already baked in) plus continued wage suppression via the population ponzi and ongoing tremors affecting housing with minor interest rate rises and policy pitched at speculators rather than owner occupiers- all doing sweet FA for the broader mood and consumption.

    If that unfolds then the .RBA reaches a point where the next rate rise triggers implosion. Until implosion the RBA will tend to hold against the USD to some extent. On the other hand any sense that the RBA is placing the interest rate cue back in the rack, while the US Fed is in hike mode, is likely to see the AUD slide against the USD – bearing in mind it is down circa 10% against the USD in the last 8 weeks, and it has been a sharp dropoff from what had been a surprising spike. Any major bad economic news could see it evacuate its bowels sharply lower again.

    A China not buying (due to geopolitics or Covid lockdowns related slowdown in China, also affected by tightening US Fed moves, or a peace deal bringing Ukraine grain or Russian gas back to the world (both unlikely) could sent the AUD to the sin bin But there would also be the risk that the RBA (always slow to respond) will see a new government positing a 5% award wage uptick (which I tend to agree with) as being inflationary and enough cause to lift rates (unless maybe the ALP in government – assuming it can avoid losing – does something about housing speculation) – from there it would only take the advent of a major Euro gas crisis or a massive coal demand surge – or global grain shortage to look a pretty good reason to get into the AUD.

    Make sure we have popcorn handy.

    Disclaimer – I personally am short AUD/USD at the moment (and nobody should ever take anything I write as investment advice of any sort)

    • I think we aren’t too far away from the FED PIVOT & many are caught positioned the same way
      I’d be careful ……
      Market will work it out ahead of FED
      Everything is pointing to a 2nd QTR – GDP
      Fed will turn on a dime

      • Grand Funk RailroadMEMBER

        I think a Fed pivot is certainly possible, but wonder if an RBA near death experience vis housing prices is closer. I reckon the latter will cling to the Carley float offered by the spending inclinations of an incoming ALP government (I think they will win but dont know if they win by enough to spend big). My thinking vis US data is it is still plausibly robust, though I agree it could change quick

        • GFR
          I honestly don’t take one notice of what the RBA will do re my view, I think they have proven to be completely incompetent
          I haven’t for a long time ever looked at Australian politics or RBA for my view on the AUD
          I only look at international, commodities, DXY sentiment positioning.
          My feeling AUD is purely driven by external factors now

          • Grand Funk RailroadMEMBER

            I think the usual market play will be to bid up the AUD on the possibility they will raise, and then sell off (assuming the Fed is still raising and the US data firm) in a big way when the RBA eventually baulks

    • This is exactly how I see it. We are nowhere near a pivot. Inflation at the pump and at the supermarket is the only game in town. People are screaming. I’ve been on main street USA for the last 2.5 weeks. Nobody cried about inflation in housing and the S&P after a decade of interest rate suppression, but consumer prices are really hurting. This is the reason behind the .5 increase. It will be the story of the mid-term elections. Everything else is noise.

  3. SoCalSurfCreeperMEMBER

    The US economy still seems to be running hot. I’m trying to get someone to quote about $30 to $40k of hard and landscaping in my front yard. Nobody with a contractors license will even come and look at it. The latest thing is to charge $150 to your credit card before they will even come and quote. Hotel prices are off the charts. I mean seriously nuts. The places that were $200 are now $400, and the places that were $400 are now $1000. Flights also absurd. It costs the same to fly to from CA to Miami or Sydney. It could take quite a few rate increases to kill it.

      • Probably illustrating how quickly the world economy (particularly US is slowing)
        Think the FED will be forced to pivot
        Fed won’t sit back with the economy going off the cliff

        Not sure what’s happening in Aust but you’d think with no handouts rising int rates & $2 petrol that Aust economy must be tipping into recession too

        • The Travelling PhantomMEMBER

          Where do you see the intrest rate by RBA at Max before they start cutting rates again? Do you reckon we’ll reach 1.5%?

      • SoCalSurfCreeperMEMBER

        I agree. It has to. The mortgage equity withdrawal, which many people use to pay for improvements, has to have stopped. Patience is key while the pig moves through the python.

      • Muttafukaburrasaurus.MEMBER

        Yeah, I think there are plenty of negative surprises in store for projects federally Lib/Nat funded that really don’t stack up. If ALP win big, might be interesting to read ANAO reports from here on in

    • So cal
      Just those prices people won’t go and stay in those hotels & will decide not to fly at those ridiculous prices

      My feeling is this is all tipping over very fast & central banks will have to ease again

      • The Travelling PhantomMEMBER

        If they ease again they’ll feed the inflation as you mentioned before…
        Wow Central Banks are jammed between a hammer and hard place

        • Listen we all know this is all going to blow apart it’s just when & how bad
          I think the average person in the street knows what a debacle this all is
          My feeling is they have one more last hurrah to wave good bye, one more party to go out with one Big Bang

          Honestly I don’t even need to say our banks won’t survive this , no chance are we walking out with the big 4 & all the little cousins

          • Muttafukaburrasaurus.MEMBER

            Haha…. Yep, how longs the fuse and is there some idiot playing with matches at some point nearer the powder keg

  4. Just looking at the AUST 10 year 3.44 & US 10 year 2.92
    Think it could be a very fast move under 3% in Aust 10 year & 2.5% US 10 year
    Think holding long end bonds is the best trade here, the move up in yields is way over done
    And farrekkk did the big bond funds take a hammering. They all exited bonds above 3% on US 10 year & no idea what happened in Australia, not sure many expectated 3.6 Aust 10 year
    Anyway the rate capitulation looks like it’s over for now

  5. Hill Billy 55MEMBER

    Bloke on Rao Paul (?) said there are a lot of AUD Shorts in play and reckons that it will hit 80c sooner than later when these get unwound. Is he making it up as he goes along/singing his book?

  6. Some of our suppliers reckon this current lockdown in China will have 10x the effect on the supply chains …..we have taken this on board and we are buying everything we can get our hands on, aim is to have 12-18mths worth

      • A local company has just started up a weekend shift, 4hr,8hrs and 12hrs. You can choose which shift suits you and your choice of Saturday/Sunday or both.

  7. Ronin8317MEMBER

    I don’t think US inflation has peaked. Look at the components of the CPI : energy price went down due to Biden opening up the oil reserve, but that only lasted for a few weeks. Price at the browser is now back to where it was, even though the crude oil price went down. We’re seeing some serious profiteering right now.

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