Risk sentiment remained at the forefront this week as US equities reset to new record highs while the Australian dollar stood out gaining well over 1% against the US dollar. Bond yields were contained, with rising concerns over the situation in French politics failing to have any spillovers. Next week sees the Fed come back to the table where the FOMC is expected to recommence the easing cycle in the US with a 25bps cut. The BoC (Canada) is also expected to cut rates by 25bps next week, while the BoE (UK) and BoJ (Japan) are likely to leave policy on hold. Domestically, the focus will be on the August employment report.
A spike in weekly jobless claims to their highest level (263k) in almost 4 years and a larger-than-expected downward to historical payrolls growth (-911k) added fresh concerns over the state of the US labour market. That follows a rise in the unemployment rate to 4.3% reported last week, a high back to late 2021. At the recent Jackson Hole Symposium, Fed Chair Powell effectively communicated that the FOMC's focus had pivoted from the inflation side of its dual mandate to its full employment objective. The recent labour market data and Powell's pivot have anchored expectations that the Fed will resume its easing cycle next week, with markets anticipating a total of 2-3 rate cuts by year end. This week's inflation data was seen as well behaved enough for rates to be reduced. Headline CPI lifted from 2.7% to 2.9%yr in August and the core rate held at 3.1%yr, both measures coming in on expectations but still well above the Fed's target, so a cautious tone can likely be expected from Powell next week.
The ECB returned from its summer break leaving interest rates on hold this week, continuing to maintain that policy is 'in a good place'. The main depo rate was left at 2% for the second meeting in succession following an easing cycle where rates were cut on 8 occasions over the preceding 13 months. President Lagarde vowed that policy decisions will remain 'data-dependent' and taken on a 'meeting-by-meeting' basis, all indications the ECB has, barring further shocks, reached the end of its easing cycle. Markets currently assess a further rate cut by year-end as a tail risk at around a 10% chance, and not before the December meeting according to ECB sources quoted by Reuters. New economic forecasts compiled by ECB staff were little changed from the previous round in June. In the post-meeting press conference, Lagarde pointed to the outlook for inflation to remain around the 2% target as behind the Governing Council's comfort with current rates settings. Lagarde also said that uncertainty around trade had decreased after the US finalised its decision to impose 15% import duties on the EU.
A lighter calendar in Australia saw survey data as the focus. Consumer sentiment on the Westpac-Melbourne Institute Index softened by 3.1% in September to a level around 4pts below the 100 marker that separates pessimism from optimism. The index has been in pessimistic territory since early 2022, though it posted its highest reading since then in August (98.5) following the RBA's rate cut. The easing back in sentiment in September looks to be more of a correction than an outright deterioration. Meanwhile, the NAB Business Survey reported contrasting movements. The confidence measure rose in August to +7 (from +5), around its long-run average. At +4, business conditions were also viewed as around average, albeit less upbeat than in July (+8). The surveys together broadly suggest that the economic backdrop in Australia remains resilient, consistent with the pick-up seen last week in GDP growth for the June quarter (see here).
