Equities saw broad-based declines from stretched positioning this week; the steepest falls came in Asia where stimulus efforts in China have fallen short of inspiring markets and on weaker sentiment post the US election. Growth and rate differentials continue to work in favour of the US dollar - 2- and 10-year Treasury yields are up 70bps since the Fed started its easing cycle in September - and markets now see a cut at the December FOMC meeting as 50/50.
Fed Chair Powell delivered a slightly stronger message than at last week's meeting by telling markets that 'the economy is not sending any signals that we need to be in a hurry to lower rates'. A Fed signalling it is seeking greater optionality sees market pricing for a rate cut in December as a finely balanced call. The next nonfarm payrolls report will be key after the numbers in October were affected by hurricanes and industrial strikes. Inflation also gives the Fed reason to be cautious. Chair Powell remarked that while the Fed is confident inflation is headed back to the 2% target on a sustainable basis, the journey is a 'sometimes-bumpy path'. Case in point was the October CPI report; a 0.2%m/m rise saw headline CPI tick up from 2.4% to 2.6%yr, while the core rate at 0.3%m/m was on the strong side of what the Fed would like to see, leaving the annual pace at a still-elevated 3.3%.
A subdued growth outlook for the euro area published by the European Commission speaks to the ECB's risk management approach to cutting rates. In its Autumn update, the Commission left its 2024 GDP growth forecast at 0.8% but lowered its forecast for 2025 from 1.4% to 1.3%. Significant uncertainty hangs over the outlook for the euro area next year, with the Commission highlighting that downside risks had increased with trade tariffs looming. The account of the ECB's October meeting outlined that the decision to cut rates by 25bps was taken largely to guard against the Governing Council falling behind the curve after seeing PMI readings on economic activity come in weak. Growth concerns are also evident in the UK. September quarter GDP growth slowed to 0.1%q/q to be up by a moderate 1.0% through the year. Speaking this week, BoE Governor Bailey outlined that addressing poor productivity was key to turning around the growth outlook in the UK.
The hawkish repricing of the RBA rates outlook received validation from solid Australian labour market data. The swaps market has adjusted from pricing a rate cut in 2024 as a 50/50 chance as recently as September to now having cuts fully priced out until the back half of 2025. A key factor in this has been the resilience of the domestic labour market. Although employment surprised to the downside for the first time in 7 months with a 15.9k rise in October (vs 25k consensus), the headline unemployment rate was unchanged at 4.1% (see here). This remains at a historically low level in Australia, while broader measures of spare capacity continued their recent tightening - underemployment declining from 6.3% to 6.2%, an 18-month low. The continuation of solid momentum in employment - the 3-month average has been in the 40-50k range over recent months - can sustain these dynamics.
Importantly, robust employment demand has been met with increased supply; while the participation rate eased in October to 67.1% it remains around record highs and materially above pre-pandemic levels. This has helped rebalance the labour market, evidenced by wage pressures that are now cooling. Growth in the Wage Price Index came in slightly below expectations rising by 0.8% in the September quarter (vs 0.9%), with annual growth moderating from 4.1% to 3.5% (see here). As the RBA has been outlining for some time, the pace of sustainable wages growth in the economy over a policy-relevant timeframe - one consistent with 2-3% inflation - will depend on productivity growth.