Risk-off sentiment weighed on equity markets this week due to elevated tech sector valuations; the ongoing US government shutdown; and uncertainty over the Fed cutting rates in December amid concerns over the health of the US labour market. The tech-heavy Nasdaq saw its largest weekly fall since early April in the wake of Liberation Day, and the broader S&P 500 was down by its most in a month. While the US dollar has of late reconnected with its safe-haven status, that trade lost some momentum this week. Treasury yields were little changed across the curve.
Domestically events this week were led by the RBA's latest policy meeting. The Monetary Policy Board (MPB) surprised no one in leaving the cash rate at an unchanged 3.6% following a stronger-than-expected upturn of inflation in Q3. My review (see here) covers the meeting in more depth, but the key take away was that the MPB looks to have set the stage for an extended pause.
Upward revisions to the RBA's inflation forecasts in the latest Statement on Monetary Policy, and the expectation that the full effects of its earlier rate cuts (75bps in total) are still playing out, has the MPC taking a cautious stance. At the post-meeting press conference, Governor Bullock said some of the recent rise in inflation was likely due to temporary factors, but inflation had also lifted in housing construction and market services - components where inflation has been more persistent. Markets lean towards the RBA cutting once more in this easing cycle, but not until well into next year.
A range of Australian data points came through during the week. Household spending slowed to a 0.2% rise in September, while underlying volume growth softened in the quarter (see here). Dwelling approvals saw a sharp 12% rebound in September but still remain at subdued levels despite RBA easing and accelerating housing price gains (see here). Surging non-monetary gold exports (62.2%) amid record high prices and safe-haven demand saw the trade surplus widen to $3.9bn in September from a 7-year low in August (see here).
The continuing government shutdown in the US deprived markets of the October payrolls report, amplifying the focus on alternative indicators to gauge the health of the labour market. Although, ADP payrolls (+42k) outperformed expectations, markets appeared more concerned about a surge in layoffs (153k) in the Challenger series. Although the Fed has articulated its focus is on the employment side of its mandate, markets are struggling to gauge the level of softening it would need to see in the labour market to justify a December rate cut, due to the lack of hard data and varying views on policy by FOMC members.
In the UK, the Bank of England's Monetary Policy Committee (MPC) left Bank Rate on hold at 4% this week. The decision proved to be tight. Members Ramsden and Breeden crossed over to join Committee doves Dhingra and Taylor in voting for a 25bps cut, leaving the 'hold' bloc on the slimmest majority possible (5). That bloc includes 4 members with strongly held views around upside risks to inflation in the UK: Greene, Lombardelli, Mann and Pill, plus Governor Bailey.
But Bailey is not far off voting to cut rates according to his summary views - a new section now included in the meeting minutes where each MPC member outlines their key thoughts on economic conditions and policy. For Bailey, if the incoming data confirms his view that inflation risks are now 'less pressing', his position is that 'further policy easing' would be appropriate.
While much has been said and written about the divisions over at the Fed, the BoE is arguably even more divided. The BoE's central forecasts in its Monetary Policy Report were little changed from its previous update in August; however, each MPC member attaches different weightings to the various risks the UK economy is facing, resulting in alternative views over the path for interest rates. There was also a sense at this meeting that the government budget to be tabled later this month will be a key part of the puzzle.
At the post-meeting press conference, Bailey said that the judgment of the MPC is that inflation has now peaked, following an uptick over the past year or so. But given headline CPI is 3.8% and underlying CPI is 3.5% - both well above the 2% target - a key risk was that inflation fails to fall back on the BoE's expected trajectory. At the same time, however, Bailey pointed to weak momentum in the economy and a slowing labour market, dynamics that pose risks to inflation falling below target.
