Market Update 23/08/2024

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U.S. equities dipped overnight, with the S&P 500 down 0.8% and the NASDAQ falling 1.4%. The Euro Stoxx 50 ended the day flat, while the FTSE 100 edged up 0.1%. The yield on the U.S. 10-year bond rose by 6 bps to 3.86% as J. Powell might throw cold water on market expectations for aggressive rate cuts this year. On the economic front, the latest data presented a “mixed bag”. Jobless claims indicated the labor market is cooling slowly rather than declining sharply. U.S. manufacturing activity contracted at its fastest pace this year due to further declines in production, orders, and factory employment. Meanwhile, existing-home sales rose for the first time in 5 months.
 
A series of remarks from U.S. policymakers were highlighted, with Kansas Fed President Schmid expressing a need for more data before endorsing rate cuts. Boston Fed President Susan Collins suggested that a “gradual, methodical pace” would likely be appropriate, a sentiment echoed by Philadelphia Fed President Patrick Harker during a CNBC interview.
 
U.S. futures continue to suggest that the Fed will ease policy four times by the end of the year, likely with a few 25bps cuts and a 50bps cut starting in September. However, recent data and Fed commentary support a soft-landing scenario, indicating a more gradual rate-cutting cycle. So, expecting a 50bps cut seems unrealistic, doesn’t it?
 
NZDUSD is trading near 0.6140 after hitting an overnight high around 0.6175. There’s ongoing debate about whether the U.S. will experience a soft landing, no landing, or hard landing. According to the USD smile theory, a soft landing would favor the NZD, while the other scenarios would not (the theory suggests that the USD performs better during periods of extreme U.S. economic strength or weakness, but underperforms when the economy is stable and global risk sentiment improves). Powell’s comments will be crucial for determining the direction of both rates and currency. Technically, the NZD faces significant resistance at 0.6180 and 0.6220, with support around the 50-100 day moving averages at 0.6050 and in the 0.5970-0.6000 zone.
 
NZDAUD is slightly higher, currently trading at 0.9157. If the trend continues, it has a good chance of reaching 0.9170 and possibly 0.9200. Yesterday Australian PMIs reported significantly stronger figures, it also raises questions about whether the RBA should revisit its policy stance. Despite market anticipating a rate cut this year as a base case, the stronger economic data might prompt the RBA to consider tightening policy.
 
NZDJPY is also showing modest gains, currently trading at 89.80. Today, BoJ Governor Kazuo Ueda will be under intense scrutiny following the recent rate hike and his hawkish signals, which significantly impacted global markets earlier this month. An unusual two and a half hour hearing, arranged by lawmakers while the broader parliament is not in session, will seek clarification from the BoJ. Additionally, Japan’s PMIs reported notably stronger figures yesterday, suggesting that the BoJ might need to consider rate hikes sooner rather than later.
 
NZDGBP drifted slightly lower and traded below 0.4700, as the GBP outperformed many other currencies following UK PMI data that exceeded expectations.
 
NZDEUR is slightly higher, supported by an increase in the euro-area PMI driven by a rise in the services index to 53.3, partly related to the Paris Olympics, while manufacturing remained weak. A key highlight was the ECB’s wage survey, showing negotiated pay grew by only 3.6% year-on-year in Q2, down from 4.7% in Q1. This result will please the ECB and bolsters the argument for more accommodative monetary policy. As a result, EURUSD has dropped 0.5% to just over 1.11.
 
On the economic calendar, NZ retail sales are scheduled for 10:45am. However, market attention is largely focused on Powell’s update from Jackson Hole at 2:00am Saturday morning (NZT) and BoJ Governor Ueda’s briefing to lawmakers later today. Ueda is set to speak at 12:30pm NZT in the lower house and again at 3:00pm NZT in the upper house.



Here are the latest mid-market rates:

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