US equities continue to struggle, worst week for S&P500 since March. UK & eurozone PMIs again report economic contraction, EUR & GBP lag. Fed's Bowman comments: additional rate increases required (note plural)

By Stuart Talman, XE currency strategist

The New Zealand dollar ended the week on a stronger footing, the US dollar giving back the prior day's gains as bond yields eased off fresh 15+ year highs whilst the three major US equity markets continued to head south.

Last week was all about the Fed's hawkish hold, the accompanying dot plots to Wednesday's FOMC no change decision stripping out some of the previously forecasted 2024 monetary easing, September projections now calling for 50bps (down from 100bps, June dot plots) of cuts through the second half of next year.

It proved a wake-up call for the market, evidenced by the weakness in US stocks and the yield on the benchmark US 10-year bond advancing through 4.50% for the first time since October 2007.

In last Monday's (18 SEPT.) update we commented:

Referencing seasonal patterns, the week ahead could be a challenging one for equity bulls. From 1990, the S&P500 has logged a week-on-week loss for the week following September’s triple witching almost 80% of the time, falling around 1% on average. Should the seasonals hold up, the Kiwi could also struggle.

Falling -3.62% and -2.93% respectively, the Nasdaq and the S&P500 had their worst week since March. Tech stocks typically underperform in a rising yield environment. Equity market bulls have notably retreated through August and September amidst concerns over a persistently hawkish Fed and the aggressive rebound in crude oil.

Ending the week above US$90/barrel WTI crude is over 35% higher from its mid-June lows, setting up to once again punch through the $100 mark. Apprehension is rising as higher energy prices have the potential to induce an inflation re-emergence, potentially requiring the Fed and other central banks to resume their respective tightening cycles following recent pauses.

Rising energy price, higher bond yields a stronger dollar and weaker stocks - a terrible mix for risk-sensitive assets, particularly when questions remain regarding additional monetary tightening and the global growth outlook.

Despite this the New Zealand dollar was the strongest week-on-week performer amongst its G10 peers, advancing +1.05%. The Kiwi was supported by firmer commodity prices, a little less gloom regarding China and Thursday's strong domestic GDP report.

For the second time during the past week, the Kiwi was bid into the 0.5980's, initiating its advance from the 0.5930's during the Asian afternoon. Gains were pared through the New York afternoon as US equities sold off into the week's close, NZDUSD ending the week near 0.5960.

Another soft round of S&P Global PMIs (FRI. evening) for the UK and eurozone economies ensured the Kiwi continued its recent bout of GBP and EUR outperformance, NZDGBP and NZDEUR advancing +2.31% and +1.25% respectively for the week.

The Kiwi also gained over 1% against the JPY and AUD.

As widely expected, the Bank of Japan maintained current policy settings and its dovish preferences at Friday's BoJ meeting.

Whilst the Kiwi can continue to strengthen on the crosses, we caution against expectations of a meaningful bounce against the US dollar given the Fed's higher for longer mantra and unfavourable September/October seasonals.

Should the US macroeconomic data flow remain robust whilst energy prices continue to head north, the Fed's December dot plots may present as even more hawkish, projecting additional hikes for 1H 2024.

Whilst this is by no means the consensus, it should not be ruled out as evidenced by Fed Governor Bowman's Friday comments in which she commented that further rate increases may be required given inflation remains too high. The plural use of further rate increases was a noted takeaway from the FOMC voter’s comments.

Following the central bank bonanza that was last week, the week ahead presents as relatively quiet.

The Fed's preferred inflation gauge, core Personal Consumption Expenditures is the headline event on the economic calendar, Friday's PCE expected to fall from 4.2% to 3.9%.

Across the Tasman, monthly consumer price index and retail sales are the focus whilst locally, the calendar is absent any tier 1 data releases.

UK and US GDP and eurozone CPI are the offshore data points that may influence short term direction.

Regarding the path of the New Zealand dollar - can the Kiwi continue to rebound following last week's G10 leading performance?

Whilst further upside is a possibility given the light economic calendar, we suspect the Kiwi may find some resistance around the 60 US cent mark given the risk backdrop may continue to lean negative as US stocks remain pressured.

We look for NZDUSD price action to range between 0.5900 and 0.6020.

Stuart Talman is Director of Sales at XE. You can contact him here.