Risk aversion remained prominent this week weighing on equities, with US declines compounded by disappointing results on the earnings front. Chinese equities advanced on news that the authorities will attempt to shore up growth via new fiscal measures. Strong GDP figures for Q3 reaffirmed the growth differential in the US over Europe as the decline in activity in the bloc according to the PMI gauge in October slid to a 3-year low. Weak growth was a factor in the ECB's decision to leave rates on hold this week, while the Bank of Canada was also unchanged. In Australia, the RBA is now expected to resume its tightening cycle after Q3's CPI data surprised on the upside of expectations. The AUDUSD lifted modestly over the week after going into the report near the lows for the year.
Australia's stronger-than-expected inflation outcomes in the September quarter may prompt the RBA to resume its tightening cycle. Prior to the report, RBA Governor Michele Bullock said in a speech that a "material upward revision to the outlook for inflation" would require additional tightening. But later in the week at a Senate estimates appearance, the Governor would not be drawn on whether Q3's CPI outcomes would constitute making this material revision to the forecasts. Australia's 3-year government bond yield spiked by around 15bps as the CPI data printed and then firmed over the rest of the week to close just above 4.3% - implying further RBA tightening is now largely priced in.
Quarterly inflation lifted in Q3 as both the headline and core rates came in at 1.2%, above expectations (headline 1.1% and core 1%) and up from 0.8% and 0.9% respectively in Q2. While fuel and electricity prices were major contributors, rising prices in the core of the basket indicate that inflationary pressures were broadly based. There were sizeable declines in annual inflation: headline retraced from 6% to 5.4% (vs 5.3%) and core down from 5.9% to 5.2% (vs 5%), but given the quarterly run-rates the RBA's forecasts for end 2023 (headline 4.1% and core 3.9%) look unlikely to be met. Upward revisions there would have implications for the outlook beyond this year. But it is hard to tell whether or not the timing for a return to the inflation target (currently projected by the RBA to occur in late 2025) would have shifted much based on this week's events. This assessment will ultimately be key to the extent of any further tightening delivered by the Board. In-depth analysis and charts covering the CPI data can be found in my review of the report here.
Strong September quarter GDP underlined the resilience of the US economy. Activity accelerated by 1.2% quarter-on-quarter (2.9%Y/Y) to post its strongest quarterly expansion since Q4 2021, with households powering growth. Personal consumption data reported spending in real terms advanced by 1% in the quarter and 1.7% on a nominal basis. Household demand appears to have strengthened alongside a reduced real income drag as inflation has declined, with the labour market remaining a key underpinning. Headline inflation according to the PCE deflator was 3.4%yr to September, down from a 6.6% pace 12 months ago, while the core deflator held at 3.7%yr compared to 5.5% in September 2022.
In Europe, the ECB held its key rates steady for the first time since the tightening cycle commenced in July last year. After 450bps of rate hikes (and some €1.8tn in balance sheet reduction), the Governing Council's tone has shifted to a higher for longer narrative, similar to the Fed. The decision statement reiterated a message that emerged at the previous meeting, with rates judged to be at levels that - if held for a "sufficiently long duration" - will assist to a substantial degree in returning inflation back to its 2% target. In the post-meeting press conference, ECB President Lagarde spoke of the forceful transmission of its earlier rate hikes into financial conditions, highlighting weakening loan demand and tighter credit standards reported in its latest bank lending survey. Lagarde said that there was no discussion this week on a potential earlier end of PEPP reinvestments.
