Corporate earnings underpinned by AI investment and resilient spending supported further equity gains in the US, though Europe declined and Asia was mixed. A Fed meeting that was seen as more hawkish than expected despite a 25bps rate cut saw Treasury yields rise, a tailwind for the US dollar along with progress in US-China trade negotiations that saw President Trump suspend his threat of 100% tariffs. The Bank of Canada also cut by 25bps this week, while the Bank of Japan and ECB held steady. In Australia, the RBA looks set to extend its pause on rate cuts next week following hotter-than-expected inflation in Q3.
In the US, the Fed's 25bps rate cut to a 3.75-4% range was broadly seen by markets in a hawkish light. The rate cut this week was fully anticipated, but Chair Powell at the post-meeting press conference cast doubt over the 25bps cut markets were pricing in for the December meeting, saying the outcome was far from a 'foregone conclusion'. The data vacuum caused by the government shutdown is concerning the Fed, with Powell saying that given the lack of visibility over economic conditions it made sense to move with caution.
The Fed's reaction function is currently weighted towards the employment side of its dual mandate, where Powell reaffirmed downside risks had increased. On inflation, Powell's summation was that tariff-related effects had pushed up near-term inflation expectations, but tariffs were still expected to be a 'one-time' shift in prices rather than sparking another wave of inflation.
Little excitement was expected at this week's ECB meeting, and little was delivered as the Governing Council left rates on hold in Florence, with the key depo rate remaining at 2%. This decision extended the ECB's pause to a third consecutive meeting, following its easing cycle that has already delivered 200bps of easing since June last year.
At the post-meeting press conference ECB President Lagarde gave no sense that further cuts are on the radar saying that the decision this week was unanimous - somewhat of a rarity for the Governing Council - and continued to reaffirm that policy remained in a 'good place'. Lagarde was generally upbeat in her post-meeting remarks, notably around the growth outlook where she said trade negotiations and the ceasefire in the Middle East had reduced downside risks.
Although euro area GDP growth in Q3 came in subdued at best at a 0.2%q/q and 1.3%Y/Y - softening from 1.5%Y/Y previously, Lagarde said those outcomes had beat the ECB's forecasts. Meanwhile, inflation remains around the 2% target - headline printed at 2.1%yr in October (from 2.2%) and core was steady at 2.4%yr - and risks to the outlook were balanced according to Lagarde.
Renewed inflationary pressures were realised in the September quarter, driving a hawkish shift in the Australian rates curve. An RBA rate cut next week has effectively been priced out - and the next 25bps cut has been pushed back to mid next year - after upside surprises in the quarter drove headline CPI (1.3%q/q) from 2.1% to 3.2%Y/Y (vs 3% expected) while core CPI (1%q/q) firmed from 2.7% to 3%Y/Y (vs 2.7%), leaving both measures right at the top of the 2-3% target band (see my full review here).
The fading effect of government rebates on electricity bills pushed up headline inflation, but the firmer core rate suggests higher prices were seen more broadly across the basket. The report will probably not unnerve the RBA - it had been suspicious inflation was running ahead of its August forecasts for 3% headline and 2.6% core by year-end - but it will likely be taken as a signal that validates some of its recent caution on further easing, as well as its key judgment that labour market conditions - in spite of the rise in the unemployment rate to 4.5% - remain tight. Watch out for my RBA preview to be published ahead of the meeting next Tuesday for more analysis.
