Markets rallied this week as the latest US inflation data was seen as confirming the peak in the Fed's tightening cycle. Although the activity data remains solid for now, warning signals about a possible US recession have increased pricing for rate cuts in 2024. Accordingly, US yields declined sharply over the week, giving a boost to most currencies against the US dollar. Rate cut pricing supported equities to broad-based gains.
A softer-than-expected US CPI report for October saw markets pricing out any further Fed rate hikes this cycle, with expectations for rate cuts increasing to around 100bps over the next 12 months. Headline CPI printed flat (0%) month-on-month (vs 0.1%), driving a deceleration from 3.7% to 3.2%yr (vs 3.3%); meanwhile, a 0.2%m/m outturn (vs 0.3%) eased the core rate to a 2-year low of 4% (vs 4.1%) from 4.1% previously. While remaining a significant contributor to inflation, shelter costs slowed notably from 7.1% to 6.7%yr, a 13-month low. Excluding housing, core services inflation was unchanged at 3.8%yr. Year-on-year core goods inflation remained flat. With inflation cooling and the labour market remaining in robust shape, consumer spending is holding up. The control group element of retail sales posted a 0.2%m/m rise in October, matching expectations.
Strong updates on the Australian labour market have not changed near-term pricing for RBA rates. The Wage Price Index accelerated by a record high 1.3% in Q3, lifting annual wages growth from 3.6% to 4%, its fastest since 2009 (reviewed here). The quarterly rise was expected and largely reflected the recent increases determined by the Fair Work Commission to the national minimum wage (8.6%) and awards (5.75%). But these increases are unlikely to be repeated with inflation declining and the labour market now off peak levels of tightness. The RBA recently pencilled in 4% as its expected peak for wages growth, so this week's update is in line with that forecast.
Coming off a soft report in September, this week's Labour Force Survey for October provided a more upbeat read on conditions (reviewed here). This was headlined by a 55k rise in employment, printing well above the expected 24k increase; combined with upward revisions to prior months, the 3-month average for employment elevated to 44.4k, its highest since May. The employment outcome was backed up by a 0.5% lift in monthly hours, partially reversing recent weakness. Labour demand is showing resilience while the boost to the supply side associated with rapid post-pandemic growth in the working age population is leading to the sort of rebalancing the RBA is looking for. The unemployment shifted from 3.6% to 3.7% and while it remains low, this compares with its 3.4% cycle low 12 months ago. Meanwhile, labour force participation rebounded to record highs at 67% in October, up from 66.8% in September and 66.6% a year earlier.
Over in Europe, the Autumn outlook published by the European Commission lowered its GDP forecasts for this year (0.6% from 0.8%) while also expecting a slower rebound of 1.2% in 2024, followed by growth of 1.6% in 2025. The downward path for inflation expected by the Commission from 5.6% in 2023 to 2.2% by 2025 was altered to incorporate an upward revision in 2024 (3.2% from 2.9%) on the back of higher energy prices. UK news was headlined by declines in October's inflation readings. 12-month headline CPI fell from 6.7% to 4.6%, a 2-year low as base effects from surges in energy prices last year fell out of the calculation. This was backed up by a softening in the core rate 6.1% to 5.7%, a low to January. Goods prices have seen substantial disinflation falling to a 2.9% on a 12-month basis from a peak that was pressing 15% a year ago. Importantly, services inflation is also softening easing to 6.6% from 6.9% previously and down from the recent high of 7.4% around the middle of the year.
