Equity markets tumbled this week as bond yields rose sharply, driven by the long end of the curve in the US. Despite this, many currencies rose modestly against the US dollar, including the Australian dollar as the RBA indicated rates may not yet have peaked; improved data from China (Q3 GDP growth printed 1.3% vs 0.9% consensus) likely also supporting. Next week's Q3 CPI data will be influential for the near-term rates outlook in Australia.
Comments from Federal Reserve Chair Jerome Powell indicated further tightening was not off the table but that the FOMC was at the point of proceeding with caution. Powell's appearance at the Economic Club of New York reiterated the sentiments of many other Fed officials in noting that higher US bond yields were contributing an additional tightening impulse to financial conditions. In his assessment, Powell said that rising yields weren't a reflection of market expectations for a higher fed funds rate, reflecting instead influences such as increased term premia, fiscal deficits, QT and US economic resilience. On the resilience factor, US retail sales were strong at 0.7% month-on-month in September (vs 0.3% expected). The control group advanced 0.6%m/m (vs 0.1%) to be up 1.6% in the third quarter - the strongest quarterly rise since Q2 2022 - reflecting robust momentum in underlying spending.
RBA communications during the week emphasised that although rates have been left on hold at its recent meetings, the Board retains the optionality to hike further. Slowing growth and easing inflation have kept the cash rate (4.1%) unchanged since June. But that situation could potentially change if next week's Q3 CPI data prompts the RBA to revise its inflation outlook and delay the anticipated return of inflation to the 2-3% target band - currently projected for late 2025. The minutes of the RBA's October meeting noted that the "Board has a low tolerance for a slower return of inflation to target than currently expected". At a public appearance, RBA Governor Michele Bullock spoke of the series of global economic shocks that have led to elevated inflation. In a domestic context, the governor noted that services inflation, rising house prices and the robust labour market were factors that posed upside risks to the inflation outlook.
Going back to the October minutes, the Board concluded that the incoming data and recent developments had "not been sufficient... to necessitate an adjustment in the stance of monetary policy". This week's underwhelming labour force report for September looks consistent with that message. Employment came in at 6.7k in the month, disappointing expectations (20k) and slowing sharply from a 63.3k surge in August (reviewed here). Nonetheless, the unemployment rate fell from 3.7% to 3.6% as the participation rate eased to 66.7% from a record high in August (67%). Declines in broader underemployment (6.5% to 6.4%) and underutilisation (10.2% to 9.9%) reflect that labour market spare capacity remains around historic lows. The key question coming out of the report was whether the rotation to part-time employment from the full-time segment over Q3 is potentially a sign of adjustment to weaker demand conditions. This appears to link with declines in hours worked of 0.4% month-on-month and 0.9% in Q3.
The ECB is widely expected to switch to a pause stance at next week's meeting. Having raised its key rates by 450bps since July last year, the account of the September meeting noted there was "ample evidence" that the transmission of tighter monetary policy was taking effect - and to a greater extent than its models had anticipated - giving the impression that the Governing Council is now prepared to sit on the sidelines. As highlighted by the Spanish central bank governor Hernández in the FT, additional tightening was coming from the steep rises in euro area bond yields. This is something that could derail an earlier end to PEPP reinvestments that has been touted recently. Turning to the UK, inflation and wage data came in either side of expectations. Headline CPI was unchanged at 6.7%yr in September (vs 6.6%), while the core rate eased from 6.2% to 6.1%yr (vs 6%). A partial release of labour market data reported UK wages growth softened from 8.5% to 8.1% in August, below expectations (8.3%) but still running at an elevated pace.
