Growth and rate differentials continue to underpin broad-based support for the US dollar. The hawkish repricing of rate cut expectations in the US sees the 2-year treasury yield trading around 4%, at levels last seen in August before the Fed commenced its easing cycle with a 50bps cut. Next week, the ECB is expected to cut by 25bps, increasing the frequency of easing from the quarterly moves the governing council has made so far. Other highlights next week include employment data in the UK (Tue) and Australia (Thu), UK CPI (Wed) and US retail sales (Thu).
It looks increasingly likely that the Fed's 50bps rate cut will be a one-off move, with the FOMC expected to downsift to more conventional 25bps increments as it moves through its easing cycle. The minutes from the September meeting reported that a 'substantial majority' of FOMC members supported a larger rate cut to start the easing cycle in the US, the move described as a 'recalibration of the stance of monetary policy' with the focus pivoting from returning inflation to target to concerns over the employment side of the dual mandate. However, the qualification that the 50bps cut should not be viewed as a signal of economic weakness or in the pace of easing going forward is consistent with what markets have heard from Fed officials since the September meeting, suggesting that 25bps rate cuts will be the play from here.
Adding weight to this view is the incoming data, an upside CPI print in September coming on the back of last week's very strong payrolls report. Headline CPI came in at 0.2%m/m to 2.4%yr, down from 2.5% but above the 2.3% consensus while the core rate ticked up from 3.2% to 3.3%yr (vs 3.2% expected). In light of last week's significant upside surprise in payroll employment in September, markets were not dented too significantly by a notable rise in initial jobless claims (+23k to 258k) that was likely impacted by hurricanes.
The minutes of the RBA's September meeting aligned with Governor Bullock's messaging on decision day that the Board does not have rate cuts on its radar nor is it concerned about policy divergence with many of its central bank peers now lowering rates. A lack of material developments in the run-up to the September meeting meant that it had been a straightforward call for the Board to leave the cash rate on hold (4.35%), while the accompanying guidance that rates would remain 'sufficiently restrictive' until more progress in made on lowering inflation toward its 2-3% target band was left intact.
Of most interest in the minutes was the Board's discussion around the various scenarios that could influence the path for rates. A 'significant' weakening in economic growth or in the labour market is seen to be the most likely trigger for the Board to move into its easing cycle, while it would also act if inflation slowed more rapidly than forecast. Regarding the latter, the key for the Board will be how slower headline inflation driven by things such as government rebates on energy bills and lower fuel prices feeds through to underlying inflation.
Alternatively, restrictive policy could be required for longer if household spending responds to the improvement in real incomes and underpins stronger labour market conditions and higher inflation than anticipated. Other factors that could require a more extended period of restrictive policy were the persistence of supply constraints or if post-pandemic productivity growth does not rebound as expected.
Turning to the key domestic data from the week, household support from the Stage 3 tax cuts and energy rebates appear to be gaining traction as consumer sentiment tracked by the Westpac-Melbourne Institute Index surged more than 6% in October as pessimsim around personal finances and the economy eased. Sentiment still remains very weak but this was at least a positive sign. In the NAB Business Survey, both confidence and conditions improved amongst firms in September while price pressures showed signs of easing.