Strength in US data and renewed tariff risks were factors that contributed to a modestly hawkish tone to markets this week. Treasury yields moved up led by the front end of the curve, the US dollar advanced and US equities softened. In that mix of US data were better-than-expected jobless claims (218k), an upward revision to Q2 GDP growth (3.8%q/q annualised) and a positive surprise for personal spending (0.6%m/m). A sterner test awaits next week in the form of the September payrolls data given the recent signs of weakness in the labour market that prompted the Fed to resume its easing cycle.
The wide range of views on the policy outlook amongst Federal Reserve officials was on display this week. The most measured remarks were unsurprisingly from Chair Powell, reaffirming a data-dependent approach that referenced risks to both sides of its mandate for 2% inflation and full employment. Those advocating for a more proactive approach to further easing (Miran, Bowman and Schmid) highlighted risks to the labour market as a key consideration. Inflation continues to remain firmly above target coming in at 2.7%yr in August for the PCE deflator while the core PCE deflator was 2.9%yr (both as expected), and President Trump's latest tariff orders add new upside risks.
Indicators of euro area and UK economic activity in the private sector remained consistent with modest growth in September. The Composite flash PMI readings came in at 51.2 in the euro area and 51 in the UK, both above the 50 level that separates contraction from expansion. Whereas the ECB appears near the end of its easing cycle, the UK's has further to run. Bank of England Governor Bailey said this week that there is 'still some further journey down in rates' provided that inflation continues to cool, with cautious households having tightened their spending. There are also ongoing concerns around the UK labour market.
The RBA is set to hold the cash rate at 3.6% next week, with Governor Bullock telling the Standing Committee on Economics that it is in a 'very good position on inflation' while the labour market is around full employment. Reverting to a hold after cutting rates by 25bps at the previous meeting would keep to the sequence the RBA has followed this year. This has seen the cash rate fall by 75bps since February. Forecasts published by the RBA last month that were based on some 50bps of further rate reductions pointed to inflation settling at the midpoint of the 2-3% target range and the unemployment rate staying in the low 4s. Since the August meeting, Governor Bullock's view was that the incoming data had broadly reaffirmed this outlook, and if anything was slightly stronger than expected.
As with the previous 3 rate cuts, the quarterly CPI data will be key. In looking ahead to that report on October 29, the ABS's monthly inflation indicator is suggesting prices have risen at a slightly faster pace in the current quarter than in Q2. Headline CPI firmed from 2.8%to 3%yr in August, adding to its earlier rise from 1.9%yr in June (see here). Measures that exclude volatile items, such as electricity with rebates pushing and pulling on inflation, have also run a little hotter through the past couple of months.
Governor Bullock's appearance before the Committee was prior to the August inflation data, though at the hearing she again downplayed the weighting the RBA gives to the monthly CPI series for policy decisions due to its limitations and volatility. But it will be alert to the upside risks to inflation from the monthly indicator, so that effectively will put the RBA in wait-and-see mode until the quarterly release comes through. On the labour market, job vacancies fell by 2.7% for the 3 months to August; however, after a rise in the prior quarter, vacancies at 327k are flat on 6 months ago. Employment growth has slowed notably over recent months - a point acknowledged by Governor Bullock - but vacancies as a share of the labour force are still relatively high at 2.1%. This is well down from cycle highs but still appears to be a factor in the RBA's confidence in the labour market.
