US equities stabilised after last week's sell-off, supported by the end to the 43-day government shutdown - though concerns over elevated tech valuations remained. European equities rebounded, Asian markets mostly advanced; however, Australia's ASX 200 declined for the third straight week, now around 5% off its late-October highs. Dollar weakness broadened, with the DXY down more than 1% for the week. In fixed income, the gilt market once again became the focus - for all the wrong reasons - amid political uncertainty ahead of the November 26 budget.
The hawkish repricing of the Australian rates outlook - set in motion by reaccelerating inflation in Q3, and the RBA hinting at an extended pause on the cash rate at 3.6% - continued this week. Employment rediscovered form rising by 42.2k in October, only the second beat on expectations (20k) in the past 6 months and the strongest result since April (full review here). It also outpaced growth in the labour force as the participation rate remained steady but elevated at 67%. As a result, the unemployment rate fell to 4.3%, reversing its shock rise to 4.5% in September - its highest level since late 2021. The swaps curve now implies just a 25% chance of another cut this cycle, down from two 25bps cuts that were fully priced in 4 weeks ago.
The more hawkish rates outlook also reflects the strength in housing market conditions. Housing finance surged in the September quarter; new lending rose 9.6% in the quarter ($98bn) - fastest rise since mid-2021 - led by the investor segment (17.6%) (see here). A 6.4% lift in underlying loan volumes (141.5k) combined with rising housing prices to drive lending higher. The latter is clearly resonating with homeowners, a key factor that drove a 12.7% jump in consumer sentiment in November, lifting the Westpac-Melbourne Institute Index to its first outright optimistic reading (>100) since early 2022. In the business sector, the NAB Survey reported an improvement in sales and profitability in October, alongside easing cost pressures.
An end to the US government shutdown will start to see the data flow ramp up again from next week. The BLS announced it will publish the September nonfarm payrolls report (previously due October 3) on Thursday. However, reports suggest that the October series for payrolls and CPI are likely to go by the wayside. September payrolls will give the Fed a little more insight going into the December meeting, where sentiment towards a rate cut has waned. That was driven by comments this week from several Fed members that are openly opposing a December cut.
In the UK, fiscal uncertainty ahead of the Autumn Budget (November 26) sparked renewed volatility in the gilt market. The FT reported that Chancellor Reeves was preparing to scrap income tax rises following less pessimistic forecasts for government revenue from the OBR. Estimates vary according to the reports, but Reeves would still need to implement spending cuts and/or tax increases to adhere to the UK's self-imposed fiscal rules and to meet existing spending promises, raising uncertainty over how that will be achieved. The malaise has also reduced expectations for the scale of further BoE easing, though two 25bps rate cuts are still priced in over the coming year. The first of those could come as early as December, after GDP growth fell short of consensus in Q3 at 0.1%q/q, 1.3%Y/Y and wages growth slowed to a 4.6%yr pace.
