A strong risk reversal occurred across broad markets this week. Equities rebounded from last week's falls, the US dollar declined, and government bond yields were lower - notably in the UK post the Budget; however, Australia saw yields rise following strong inflation data, and markets are now starting to price a hike as the next move from the RBA.
In Australia, upside surprises in the October inflation report and expectations for a solid Q3 GDP growth outcome next week saw markets price out the chance of any further RBA cuts this cycle. Headline CPI rose to 3.8%yr (vs 3.6% exp) from 3.6%yr in September, while the core or trimmed mean measure firmed to 3.3%yr from 3.2%yr, defying forecasts to fall to 2.9%yr (reviewed here). Unwinding electricity rebates were the familiar culprit for higher headline inflation; however, the rise in core inflation and an uptick in services prices (3.9%yr from 3.5%yr) was consistent with the broad reacceleration of price pressures that has seen the RBA turn more cautious. A solid Australian GDP growth outcome of 0.6-0.7% in Q3 is expected next week, with full my full preview available here. That follows upbeat data on business investment (6.4%) - strongest quarterly rise since 2012 (see here) - and rising momentum in residential and non-residential construction activity (see here).
Markets took the UK Budget in their stride, despite plans by the government to further raise near-term spending (£9bn) while delaying the tax increases (£26bn) to fund it for at least a couple of years. The DMO's remit for Gilt sales in 2025/26 has risen following the Budget, lifting by £4.6bn to £303.7bn - below the expected increase of £8.6bn in a Reuters poll. Meanwhile, the OBR determined that the government's fiscal headroom - the buffer against its mandate to return the budget to balance by 2029/30 - has increased from £10bn to £22bn. With those key market-relevant aspects being well received, pricing is weighted heavily (90%) towards the BoE cutting rates on December 18.
Within the more granular detail, the Budget failed to bring forward policy measures to boost the outlook for the UK economy. The OBR effectively estimated the new measures (including welfare and energy bill relief) to be growth neutral, leaving the economy exposed to weaker productivity growth. Accordingly, the OBR lowered its forecast for GDP growth from 1.8% to 1.5%, on average, through to 2029/30. Energy bill assistance is expected to knock 0.3ppt off inflation next year to 2.5% before slowing to 2% - in line with the BoE's target - from 2027 onwards.
Backlogged US retail sales data for September was weaker than expected and the Fed's Beige Book noted signs of labour market weakness. Headline sales fell short of the mark rising 0.2% in September (vs 0.4%), while core (0.1%) and control group sales (-0.1%) also turned in disappointing showings. The Beige Book in November reported 'weaker labour demand' in around half of the 12 reporting districts. Signs of the AI impact were highlighted as firms were generally looking at limiting headcounts and adjusting hours rather than responding to weaker demand with layoffs.