Equities mostly advanced over the week, though sentiment was shaky amid continued uncertainty over US-China trade. Concerns over US regional banks also emerged, but earnings results from the major institutions were strong. In France, PM Lecornu survived two no-confidence votes, easing pressure on the government for now. A weak labour force report in Australia saw bond yields decline significantly, the 10-year segment falling to lows since April as markets now eye an RBA rate cut in November.
The RBA's caution on further rate cuts is set to be tested after Australia's unemployment rate unexpectedly spiked to a 4-year high in September. Employment rose by 14.5k but disappointed expectations (20k) for the 4th time in the past 5 months, and with the participation rate rebounding to a near record high 67%, the unemployment rate printed at 4.5% from an upwardly revised 4.3% in August (reviewed in full here). Markets repriced sharply on the figure, with the implied probability of a 25bps cut in November surging from 35% to 80%. The prevailing message from the RBA - reiterated this week in the September meeting minutes and in speeches by Assistant Governors Hunter and Kent - has essentially been that policy is well placed, achieving both of the Board's policy objectives for 2-3% inflation and full employment.
Progress on the inflation side of the dual mandate has been the driving factor behind the RBA's 3 rate cuts since the start of the year. With the RBA highlighting upside risks to inflation in the upcoming CPI report for Q3 (due October 29), it has stuck to a cautionary tone on prospects for further easing. But with risks around the labour market rising, the Board is likely to start giving greater focus to the employment side of its mandate. Such a pivot would pave the way for a November cut.
In the US, the Fed's Beige Book for October reported that activity in 9 of the 12 districts was either flat to slightly weaker, with the high level of uncertainty around the economic outlook being a key factor. In the absence of top-tier data amid the ongoing government shutdown, those themes broadly aligned with market pricing for 2 Fed rate cuts by year-end. That is the baseline outlook that markets hold, as the host of officials from the Fed that spoke publicly this week stuck to their previously expressed views on the appropriate course for policy.
Comments from BoE Chief Economist Pill indicated that the easing cycle in the UK could be set to slow; however, soft labour market data suggests it has further to run. Private sector wage growth eased more than expected to a 4.4%yr pace from 4.7% previously, as the unemployment rate indicator lifted from 4.7% to 4.8% - its highest since mid-2021. Meanwhile, payrolled employment fell by 10k, posting its 8th consecutive contraction.
