Concerns over AI-related financing led to heavy declines in US and Asian equities this week. In turn, US Treasuries received a solid bid - the 10-year yield recorded its largest week decline since February this year and the 2-year segment also fell (-8bps) - despite continued inflationary pressures after Fed Chair Warsh speaking at the IMF meetings indicated there was no urgency for further hikes. Fed pricing implies only around a 15% chance of a rate hike later this month. That may have weighed on the US dollar, which fell around 0.4% for the week despite the broader risk averse tone.
US inflation data matched expectations in headline terms but was stronger than forecast on a core basis, reflecting broad-based price increases. Headline CPI lifted 0.6%m/m and 3.7% over the year to September, up from 3.4%; however, core CPI firmed to 0.3%m/m and 2.6%yr (from 2.4%). While energy prices surged (5.2%m/m), increases across core goods (0.3%) and services (0.4%) confirmed a wide range of the basket drove the result. Additionally, producer prices lifted 1.3% in the month, well above expectations (0.5%), pointing to further inflationary pressures in the pipeline.
The minutes of the RBA's September meeting gave further context to the Board's decision to raise the cash rate by 25bps to 4.6%, its fourth rate hike this year. Upside risks to inflation were judged to have 'materialised or were building', with global cost pressures from higher oil prices and the AI-related boom coming on top of existing domestic capacity constraints. The Board was also mindful that with markets offshore pricing in tighter policy, financial conditions at home could ease via a weaker exchange rate if it failed to move.
On the labour market, the prevailing view was the conditions were broadly consistent with its full employment mandate; however, data this week brings that into question. Employment fell by around 39k in September, a sharp downside surprise on the 20k consensus figure (see here). Although there is some uncertainty around the data given recent survey changes, the unemployment rate now stands at 4.7% - its highest since late 2021 - while it averaged 4.6% in the September quarter, already above the RBA's year-end forecast (4.5%). Markets have priced out expectations for another rate hike this year to just a 1 in 3 chance but still see another hike coming in 2027 to conclude the tightening cycle.
