Equities markets mostly made modest gains, adding to last week's rally - though higher yields at the longer end of the curve were a headwind. Pro-cyclical currencies (EUR and AUD) rose against the US dollar, while the JPY strengthened on signals the BoJ is preparing to hike later this month. Next's week's Fed meeting shapes as the key risk event for markets heading into year-end.
Expectations are firmly set on the Fed cutting by 25bps next week. But with inflation remaining elevated to the 2% target, the Fed could be non-committal on further cuts - somewhat of a risk for markets pricing in 100bps of additional easing. Backward-looking inflation data for September released late in the week matched consensus: the PCE deflator was 0.3%m/m and 2.8%Y/Y (from 2.7%), while the Fed's preferred core PCE measure was 0.2%m/m and 2.8%Y/Y (from 2.9%). On the other hand, the same report showed spending lacked punch in September slowing to 0.3%m/m in nominal terms (from 0.6%) and stalling (0%m/m) on a real basis. Softer consumption saw the Atlanta Fed model downgrade its estimate for Q3 GDP growth from 3.8% to 3.5%.
Euro area inflation data for November likely keeps the ECB in a holding pattern. Headline inflation ticked up from 2.1% to 2.2%Y/Y and the core rate was steady at 2.4%Y/Y. Part of the ECB's caution to cut further relates to elevated services inflation, which lifted from 3.4% to 3.5%Y/Y. The economic backdrop in the bloc has consistently surprised with its resilience throughout the year, and that was reflected in Q3 growth being revised up to 0.3%, with growth through the year at 1.4%.
In Australia, markets have signaled the end of the RBA's easing cycle ahead of next week's meeting, now pricing in a rate hike as the next move, likely in the second half of 2026. The hawkish repricing followed household spending accelerating by 1.3% in October - its fastest rise in more than 18 months - while GDP growth in the September quarter of 0.4% was stronger than it looked despite missing expectations (0.7%). Annual growth firmed to 2.1% - already above the RBA's year-end forecast for 2%. The rates curve points to the cash rate (3.6%) staying flat until well into next year amid renewed inflationary pressures, still-robust labour market conditions and a resilient domestic growth backdrop - dynamics that are eventually expected to see the RBA tighten policy.
Household spending rose 1.3% in October - sharply more than expected (0.6%) - with early Black Friday sales and major events (live sport and concerts) driving a reacceleration in discretionary spending (1.6%) after a soft Q3. Real GDP growth slowed to 0.4% in the September quarter from 0.7% in the June quarter - partly due to softer household consumption (0.5%) as discretionary demand pulled back (-0.2%) - though it was inventories (-0.5ppt) and net exports (-0.1ppt) that weighed most heavily.
Excluding those volatile components, domestic demand - a more accurate gauge of the underlying momentum in the economy - lifted by 1.2%, its strongest rise since Q2 2023. That included the household consumption gain (0.5%), while business investment picked up strongly (3.4%) on AI and cloud capabilities. Meanwhile, renewed strength in public demand (1.1%) and support from dwelling investment (1.8%) ensured the pick-up in domestic demand was broadly based. In other news from Australia, monthly data for October showed a 6.4% fall in dwelling approvals and a wider trade surplus of $4.4bn. Meanwhile, the current account deficit was broadly unchanged at a little above 2% of GDP in Q3.
