Markets drifted through the week in the absence of any new catalysts and limited data. US equities continued to outperform while a rebound in US Treasury yields offered support to the US dollar. Domestically, the RBA ended a 4-month pause with a 25bps rate hike in response to recent upside surprises in Australia's inflation readings. Highlights on next week's calendar include US CPI and retail sales, China activity data, UK CPI and wage and labour market reports in Australia.
The RBA Board's decision this week to resume its tightening cycle with a 25bps hike to 4.35% came on the back of increased risks to the inflation outlook (reviewed here). While policy will continue to key off the incoming data, prospects for future hikes seemed to be cast in a slightly different light as the Board's guidance that "Some further tightening of monetary policy may be required..." was tweaked to "Whether further tightening of monetary policy is required...". Post the meeting, the quarterly Statement on Monetary Policy provided deeper insights into the RBA's thinking. Since the previous forecast round in August, the Australian economy has been more resilient than the RBA had anticipated and inflation has not slowed as quickly as expected.
The November forecasts were adjusted to reflect these developments; the trajectory for growth is now higher in 2023 (1.5% from 1%) and 2024 (2% from 1.75%), resulting in a lower peak in the unemployment at 4.25% by the end of next year, down from 4.5% previously. The downside is that an improved economic outlook has contributed to a deterioration in the inflation forecasts, particularly in the near term. Inflation is now seen ending 2023 at 4.5% on a headline basis (from 4.25%) and 4.5% on the core rate (from 4%), with a slower decline then occurring through 2024 to 3.5% headline (from 3.25%) and 3.25% core (from 3%). Late 2025 still remains the timeframe the RBA anticipates it will take for inflation to be back within its 2-3% target, albeit the latest forecasts at that horizon (2.9% headline and core) are sitting near the top of the target band.
Federal Reserve Chair Jerome Powell delivered markets a warning that rate hikes were not off the table and that a long road was still to be travelled to get inflation down to its 2% target. Although markets price the next move from the Fed to be rate cuts in 2024, Chair Powell said the FOMC wasn't yet convinced that rates were high enough at their current 5.25-5.5% range. But the cumulative effects of its earlier hikes are acknowledged by the FOMC as still being in the pipeline and for this reason, it has communicated it will proceed carefully. Some of these effects were evident in the Senior Loan Officer Opinion Survey for October, which reported a broad-based tightening of lending standards and weakening in loan demand over Q3.
Speaking after an address in Dublin, Bank of England Governor Andrew Bailey said that restrictive monetary policy would be needed "for an extended period" and that rate cuts were not on the radar. Markets are sceptical and have rate cuts priced for the second half next year - something BoE Chief Economist Huw Pill said "doesn't seem totally unreasonable". UK GDP growth stalled in Q3 - after weak first-half growth of 0.5% - only validating market pricing. ECB President Christine Lagarde told an FT event that rates at their current setting - if maintained for long enough - could return inflation to the 2% target. President Lagarde said that long enough meant no prospect of rate cuts for the "next couple of quarters".
