It was another volatile week across asset classes with renewed geopolitical risk from the Middle East, a hawkish repricing of the Fed's easing cycle and concerns around fiscal deficits in Europe all in the mix. China continued to rally on the back of last week's stimulus announcements prior to closing for the golden holiday period. Rate differentials are seemingly back in favour of the US dollar; strong labour market data and comments Fed Chair Powell support a more gradual pace of rate cuts in the US, contrasting with ECB officials expressing concerns over headwinds to growth and Governor Bailey at the BoE hinting at hiking more aggressively.
Renewed strength in the US labour market has reduced the risk of a hard landing in the near term, driving a hawkish repricing of the Fed curve. The expectation is that the Fed will now downshift to 25bps rate cuts following the initial 50bps move, while the extent of rate cuts priced through the cycle has pulled back by around 50bps from a week ago. After job openings surprised to the upside at 8mn in August early in the week, payrolls data came in hot leading into Friday's US session.
Nonfarm payrolls surged by 254k in September, well above the 150k figure expected as revisions added back 72k to payrolls over the prior two months, reversing the trend of negative revisions. Arguably, the greater surprise came via the fall in the headline unemployment rate from 4.2% to 4.1% (vs 4.2%), a low since June, with the broader underemployment rate also declining from 7.9% to 7.7%. This retightening of the labour market came with participation holding at an unchanged 62.7% for the 3rd month in succession. An uptick in average hourly earnings growth to 4%yr (from 3.9%) rounded out the report.
In the euro area, markets anticipate a more dovish ECB going forward as inflation continues to cool and concerns over the growth outlook are rising. Headline inflation slowed to 1.8%yr in September, down from 2.2% and the core rate eased from 2.8% to 2.7%yr, both outcomes in line with expectations. ECB President Lagarde told the EU Parliament this week that disinflation was accelerating while the economic recovery in the bloc was facing headwinds. Similarly, the ECB's Schnabel said a sustainable return to 2% inflation was 'becoming more likely' and that it could not ignore risks to economic growth.
Upbeat Australian retail sales data combined with robust housing market conditions suggest the RBA will continue to hold off the start of its easing cycle. A solid 0.7% rise in national retail sales in August exceeded expectations and lifted annual growth to 3.1%, its fastest pace since May 2023 (reviewed here). A warm finish to the winter and spending in the lead-up to Father's Day underpinned an uplift in discretionary sales (0.8%) that drove the headline increase. The Stage 3 tax cuts, effective from July 1, may also have provided some support.
With the effects of rapid population growth continuing to be felt in housing markets across Australia, CoreLogic clocked the national median housing price at $807k in September, a gain of 1% for the quarter and 6.7% over the year. Alongside rising housing prices, lending commitments extended their upswing with a further 1% gain coming through in August (reviewed here). At $30.4bn, commitments stand 31.5% above their cycle low in early 2023. Meanwhile, housing credit growth in August was running at a 5% annual pace. Staying with the housing theme, volatility in the higher-density segment saw dwelling approvals pulling back in August (-6.1%) from a sizeable gain in July (reviewed here). Lastly, the nation's trade surplus printed at $5.6bn in August (reviewed here), unchanged from the prior month around offsetting movements in exports (-0.2%) and imports (-0.2%).