A reset in UK politics following the resignation of PM Truss and the rescinding of "The Growth Plan" mini-budget led to a retracement in gilt yields, giving broad support to sentiment. European equities advanced while the US was boosted by solid earnings results, though Asian markets underperformed. The upbeat dynamics saw the US dollar weaken as the news came through of more intention by Japan to defend the yen.
RBA elaborates on its downshift
A nuanced assessment of conditions and uncertainty over the economic outlook prompted the RBA to downshift the pace of its hiking cycle to a 25bps increase earlier this month following four consecutive 50bps moves. The October meeting minutes outlined the debate the Board had around hiking by 25 or 50bps, with the analysis ultimately supporting the former. Key factors were downside risks posed to domestic economic growth with the earlier rate hikes yet to have their full impact on conditions; wages growth running at a pace not "inconsistent" with the inflation target; a deteriorating global economic outlook; and an overarching judgement that a slower pace of tightening was appropriate given the uncertainty of the outlook.
The Board was cognizant that its decision to downshift would make it an outlier amongst its central bank peers still in the process of frontloading rate hikes, coming at risk of making it harder to return inflation to target if there was a dovish reaction in markets and inflation expectations moved higher. The RBA countered those risks by noting it met more frequently than other central banks, allowing for more flexibility in its tightening cycle. That was a point emphasised by the RBA's Michelle Bullock in a speech this week, where the deputy governor noted the pace of the bank's tightening cycle had matched or exceeded that seen in other comparable economies.
The key inputs for the RBA remain the labour market and inflation. September's labour force survey reported a broadly unchanged analysis on conditions from the prior month, with the unemployment rate holding at 3.5% on a minimal rise in employment (0.9k) and steady participation (66.6%) (reviewed in full here). The report was consistent with the RBA's downshift with the labour market remaining robust but looking to be tracking toward a consolidatory phase post pandemic. Next week will see the treasurer presenting the federal budget (25/10) followed by the inflation data for Q3 (26/10).
Bank of England puts QT back on the radar
As the Bank of England's interventions into the gilt market came to an end, the central bank put quantitative tightening (QT) back on its radar. The BoE now says it plans to commence active sales of its gilt holdings on 1 November after the planned September start date was derailed by market dysfunction that ensued after the announcement of the Truss government's mini-budget.
With fiscal support now greatly rolled back, the BoE will have to assess the implications for monetary policy from an inflation outlook now likely to be higher in the medium term and with weaker growth dynamics. A speech by the BoE's Ben Broadbent cast doubt over the scale of tightening priced into rates markets where the terminal rate sits above 5%. Meanwhile, inflation has continued to rise, with headline CPI moving back up to 10.1%yr in September (from 9.9%) and the core rate resetting to a new 30-year high at 6.5%yr (from 6.3%).
ECB set to hike rates by 75bps again
Indications in the lead-up to next week's ECB meeting point to another 75bps rate hike being announced by the Governing Council after the increases in July (50bps) and September (75bps). The hawkish stance remains firmly intact as euro area inflation in September was confirmed to be running at 9.9%yr on a headline basis with the core rate at 4.8%yr. In addition to rates, recent media reports mean the ECB's thinking on QT and its TLTRO programs is set to come under the spotlight in the post-meeting press conference.
The reporting has suggested that the plans being drawn up for QT centre on the phasing out of APP program reinvestments from Q2 next year. Meanwhile, the ECB appears keen to reduce excess liquidity in markets by prompting banks into the earlier repayment of their TLTRO loans. According to the reports, options for achieving this include retroactive changes to the program terms or by adjusting the tiering multiplier, in effect lowering the remuneration paid by the ECB on banks' TLTRO balances.
Fed's Beige Book reported signs of weakening demand and easing prices
US economic conditions were broadly described to have "expanded modestly" in the latest Fed Beige Book amid signs that rising interest rates were starting to take effect. High inflation remains a headwind, though there had been some easing in price pressures on the back of falling fuel and freight costs, while pricing power among firms was starting to become more bifurcated as customers in some industries were now pushing back on price rises. The impact of rate hikes were assessed to be weighing on the housing market and discretionary spending more broadly, though supply chain disruptions were also a factor, notably affecting new vehicle sales. Some cooling in labour demand was reported by firms due to concerns over a weakening economic outlook, though the labour market was still tight and was pushing up wage costs.