Markets found some relief from the relentless rise in longer duration yields as the benchmark 10-year Treasury yield saw its first weekly decline since late August. Treasury Secretary Bessent sought to downplay concerns around higher yields, while solid demand at 10- and 30-year bond auctions during the week was also important. US equity markets posted gains and the risk sensitive AUD picked up ground against the US dollar - though the DXY index still lifted for the week given the high weighting of the euro, which continues to remain weak amid France's fiscal concerns.
Market pricing for an October Fed rate hike remains low, sitting around 20% after falling from around 70% on the back of last week's softer-than-expected US labour market and inflation data. That was reinforced by this week's comments from Governor Waller that highlighted flexibility around the timing of rate hikes following September's 25bps increase. The minutes from that meeting were hawkish, reflecting not only the unanimous vote for the rate hike but also significant support for additional tightening this year, but that failed shift markets. However, next week's CPI report shapes as a risk event that could fuel a hawkish repricing.
In the euro area, the impact of France's fiscal concerns continues to see elevated bond yields tightening financial conditions, effectively taking ECB hiking prospects off the table in the near term. Market discussion of how the ECB might respond centres on three courses of action: the ECB walking back its hawkish narrative; ending quantitative tightening and also reinvesting proceeds from maturing bonds; and (least likely) calling upon its Transmission Protection Instrument to close spreads. The account of the meeting back in September was released this week, outlining that upward revisions to the inflation outlook in 2027 and 2028 prompted the ECB to hike by 25bps.
Focus in Australia turns to next week's labour market report, while the minutes of the RBA's September meeting where it hiked the cash rate by 25bps to 4.6% will also be of interest. The labour market is expected to have increased employment by 20k in September, a step down from August's rise (39.5k) but enough to keep the unemployment steady at 4.6%. A key point to watch in the minutes will be how the RBA reflects on the restrictiveness of the cash rate after this latest hike. Pricing for one further RBA hike before year-end has declined to 38% from around a 50/50 chance following the September meeting.
