Equities lost steam this week as US tech weighed on broad sentiment. The US dollar has continued to climb with the relative strength of the US economy seeing Fed rate cut prospects for 2024 being scaled back. Higher oil prices may have been key to bond yields trading with an upward bias over recent days. Next week's highlights include US CPI, the ECB's meeting, activity data from China and labour market updates in the UK and Australia.
The RBA held the cash rate unchanged at 4.1% for the third meeting in succession this week (reviewed here) - the final meeting of Governor Philip Lowe's 7-year tenure. Signs that higher interest rates are gaining traction in bringing down inflation and slowing demand are keeping the Board on hold - consistent with its data-dependent reaction function. Although the Board maintains that "some further tightening of monetary policy may be required..." rates increasingly look to be at their peak in Australia. Markets anticipate the RBA will hold rates at this restrictive setting until well into next year - the timing of the first rate cut is currently priced to come in the final quarter of 2024. In his closing remarks speech, Governor Lowe forecast that inflation would be subject to increased variability - reflecting deglobalisation, climate change, energy transition and supply shocks - and that closer alignment between monetary and fiscal policy would be beneficial in managing inflation in that context.
Australian GDP growth came in at 0.4% in the June quarter and 2.1% through the year. While the domestic economy remains resilient to headwinds here and offshore, growth slowed noticeably over the first half of 2023 (0.7%), validating the RBA's pause. Household consumption nearly stalled at 0.1% in the quarter under the higher cost of living - accentuated by rising interest rates and increased income tax liabilities. These pressures are binding on discretionary consumption (-0.5%q/q), which contracted over the first half of the year (-0.7%). Please take a look at my In review feature article covering the June quarter National Accounts for detailed insights on the Australian economy here.
Many Federal Reserve officials gave their assessment on US rates this week, the general consensus validating expectations for a tightening pause at the September meeting. NY Fed President Williams perhaps summed up sentiments best by observing that monetary policy was "in a good place" with inflation coming down and supply-demand pressures in the economy easing - but that the FOMC needed to ensure this progress continued by remaining data-dependent. While a September pause is considered a done deal, markets are keeping the door open for a rate hike in November. Next week's CPI data will therefore be closely watched. Base effects are expected to see headline CPI firm from 3.2% to 3.6%yr in August, so markets are more likely to key off the core rate and this is forecast to ease from 4.7% to 4.3%yr.
In Europe, attention is focused on next week's ECB meeting - anticipated to be a close call between a hold or a 25bps hike from the Governing Council. For a single mandate central bank of 2% inflation, additional tightening remains in prospect in spite of further signs of deterioration in the euro area economy. Q2 GDP growth was revised down to 0.1% from 0.3% and the composite PMI for August (46.7) indicated economic activity was deteriorating at an increased pace, while July retail sales fell 0.2%m/m (-1%yr). Bank of England Governor Andrew Bailey told the Treasury Committee this week that rates were "much nearer" their peak amid signs that inflation will continue to fall. UK wage and employment data will be important next week with markets leaning in the direction of a further two BoE hikes to a peak of 5.75%.