Signs the ECB's tightening cycle has peaked amid ongoing resilience in the US economy left the US dollar to continue its upward momentum. Improved activity data from China provided some support for the Australian dollar as did a rebound in the August labour force survey. Next week's calendar is highlighted by central bank meetings in the US, UK and Japan.
August's US inflation data did little to shift the dial ahead of next week's Federal Reserve meeting. The FOMC is expected to leave rates unchanged at 5.25-5.5%, but markets are keeping alive prospects for a November hike on the basis that Fed officials may reaffirm their projection from June for a 5.5-5.75% terminal rate. Headline CPI lifted from 3.2% to 3.7%yr, largely due to a 10.6% surge in gasoline prices in August; however, a decline in the core rate from 4.7% to 4.3%yr suggests the underlying disinflationary process in the US continues to play out. Higher gasoline prices also boosted August retail sales to a 0.6% month-on-month rise, an upside surprise. But there were continued signs of resilience in the report as core sales (ex autos & gas) (0.2%m/m) and control group sales (0.1%m/m) defied expectations for declines.
In what was a closely contested decision, the ECB hiked all key rates by 25bps (MRO 4.5%, MLF 4.75% and depo rate 4%) this week. But that was counterbalanced by strong indications that the tightening cycle has reached its peak. Faced with elevated inflation and an economy that has deteriorated to the point of stagnating, the hawkish section of the Governing Council got another hike across the line on the basis that it needed to "reinforce progress" towards its single mandate for 2% inflation. Further tightening looks unlikely. The Governing Council assesses that rates are now at levels that - if maintained for a "sufficiently long duration" - will "make a substantial contribution" in returning inflation to its 2% target.
In the post-meeting press conference, ECB President Christine Lagarde would not be drawn on declaring a peak for rates, stressing the need to remain data dependent. That came as updated ECB staff projections raised the inflation outlook at the same time as lowering forecasts for growth. Due to higher energy prices, inflation is now seen at 5.6% this year (from 5.4%) and 3.2% in 2024 (from 3.0%). As with the June forecasts, inflation is still expected to be firm to the target in 2025 at 2.1% on a headline basis (from 2.2%) and 2.2% on the core rate (from 2.3%). Higher rates, weakening exports and fading momentum in the services sector have all contributed to lower forecast growth at 0.7% in 2023 (from 0.9%) and 1% in 2024 (from 1.5%).
Australian employment rebounded by 64.9k in August - well above the top end of forecasts - confirming seasonal-related volatility played a major role in July's surprise decline (-1.4k revised from -14.6k). With employment regaining momentum, the unemployment rate held at 3.7% as the labour force participation rate lifted to a new record high at 67.0% (from 66.9%). My assessment is that rapid population growth is supporting both labour demand and labour supply, giving reason to remain optimistic on the outlook for the labour market (more insights here).
