A lull of major events saw markets trading narrow ranges this week. On the equity front, the US has pushed up to new record highs while support from the authorities in China boosted its beleaguered markets. A broadly similar message came from policymakers across the US, Europe and Australia this week cautioning against early rate cuts. Bond yields were modestly higher in response.
A host of officials from the Federal Reserve--led by Chair Powell--gave the impression that more confirmation of disinflationary trends was needed to conform a consensus that rates can start to be eased from their peaks. This starts with next week's January CPI report, while annual revisions to CPI readings in 2023 proved very minor and so did not alter the narrative around cooling US inflation. Comments from the ECB's Schanbel to the FT were consistent with her earlier statements that the 'last mile' in bringing inflation back to target is likely to prove the most difficult.
Markets have pushed back pricing for rate cuts in Australia to the second half of the year following the suite of RBA developments this week. The Board held the cash rate unchanged at 4.35%, highlighting that this setting is working to slow growth and bring down inflation - encouraging signs given its assessment of excess demand in the economy. The meeting is covered in more detail here, but the key takeaway was that the Board wants to see more progress before thinking about rate cuts. That said, the Board did tweak its guidance in such a way that neither rules further hikes in or out, a softening in its stance from a clear tightening bias.
An outlook for slower growth and lower inflation published in the Statement on Monetary Policy appears to have prompted this shift. But in the baseline outlook, inflation is not seen returning to the midpoint of the 2-3% target band until mid-2026. Appearing before a parliamentary committee, Governor Bullock said said there remained a lot of uncertainty around the inflation outlook - in particular regarding services prices - and that the Board needed more data to give it confidence that inflation is on track to return to the target band on a sustainable basis. In light of this, current pricing has the first RBA rate cut coming in August. This looks reasonable given it would allow the Board to take in the inflation reports for Q1 and Q2 and watch the other data come in over the first half of the year.
