Global Economic Crossroads: Inflation, Labor, and Currency Shifts

AUD

As we predicted last week, the Australian dollar, having rallied significantly since early September, was vulnerable to a correction if the employment report under-performed—which it did. The economy shed 5,400 jobs in August, falling well short of expectations for a 22,000-job gain. Although the participation rate declined, the unemployment rate remained stable at 4.2%. This week, focus shifts to the September PMI survey, set for release on Tuesday, and the crucial August CPI data, expected to hold steady at 2.8% after July’s sharp energy-driven increase

NZD

The kiwi was the weakest performer among G10 currencies last week, and for good reason. New Zealand’s economy contracted by 0.9% in the second quarter, significantly underperforming forecasts of 0.3% growth, with construction and manufacturing sectors dragging down the results. On an annual basis, the data was equally grim, showing a 0.6% contraction, despite the RBNZ having already slashed its benchmark interest rate by 250 bps. High-frequency data for the third quarter offers no respite, as the services PMI index has remained in contractionary territory for eighteen consecutive months. Consequently, investors have increased their expectations for further rate cuts, with swap markets now fully pricing in a cut by the RBNZ in October. A larger, “jumbo” cut is also under consideration, with markets assigning it a 30% probability. With a relatively quieter week ahead for New Zealand, NZD is likely to be influenced by events and developments elsewhere.

USD

Markets had diverging reactions to the widely expected 25bp Federal Reserve cut last week. Stocks chose to interpret it bullishly, as they seem to do with every single piece of nes lately, and rallied to fresh records. Bonds, however, seemed to be disappointed by the fact that only the most recent Trump appointee to the board voted for a 50bo cut, and by the wide dispersion of expectations evident in the “dots plot”, which suggest deep divisions about whether to prioritize above-target inflation or the weakening labor market. This week’s August PCE inflation report out Thursday will be the main focus of attention for the US dollar.

CNY

While it barely nudged the yuan, China’s August economic data added to the gloom. Releases disappointed across the board. Particularly unpalatable were the retail sales numbers, which showed a slowdown to 3.4% YoY, and data on investments. Even the usually robust industrial production faltered. Finding a silver lining is tough—property data also flopped, signalling the sector’s crisis is far from over. To top it off, unemployment crept up.China’s hope of boosting the significance of consumption still seems elusive, and while we probably should not get carried away with one month of readings, China’s ambitious growth target of around 5% appears to be slipping away. On a brighter positive note, US-China dealings appear to be moving in a positive direction. China dropped its lengthy antitrust probe into Google, and Trump and Xi made headway on the TikTok deal and plan to meet in South Korea in six weeks to discuss trade and other things. 

 JPY

As expected, the BoJ kept rates steady in September. But rate increases appear to be creeping closer – two of the nine board members voted for an immediate hike. The market’s split on timing, with October and December both in play. This makes upcoming data releases critical. This week, we’ll get a batch of data on activity and inflation, with PMIs out on Wednesday and Tokyo CPI – on Friday. On the bank’s policy normalisation journey, it’s worth mentioning that for the first time, the bank announced a plan to sell its mammoth ETF holdings worth an equivalent of $500 bn and some change. By the current timetable, the process is set to be very gradual or rather, glacial, as it would take over 100 years to dispose of these assets.