The postponement of the key nonfarm payrolls release for January until next week left markets with second tier US data and reporting results to focus on. Tech-related plays hit US and Asian equities this week on concerns that capex plans are escalating amid uncertainty over the return on investment from AI infrastructure. This was a factor in the USD seeing a modest rebound (still down 9.6% on 12 months ago) - though the local AUD remained supported following a hawkish hike from the RBA - while the BoE was dovish in holding and the ECB offered little resistance to euro strength. Next week's highlight is that delayed US payrolls report (Wed) as well as CPI data for January (Fri).
A largely uneventful ECB meeting saw the Governing Council leave rates hold - the key depo rate remaining at 2% - with President Lagarde reaffirming the existing view that policy settings are 'in a good place'. The main interest was whether any cracks would emerge in that stance given the strength in the euro - ostensibly a headwind for growth for the export-oriented euro area economy. But at the post-meeting press conference Lagarde downplayed the effect of the exchange rate, pointing to the fact that EUR/USD was currently around its average level since its inception. Market pricing was unchanged for the ECB to remain on hold through the year.
In another tight decision (5-4 majority), the BoE went back to holding rates (3.75%) after cutting by 25bps in December. Pre-existing market pricing for a June rate cut was vindicated as the statement noted 'Bank Rate is likely to be reduced further', while new forecasts in the quarterly Monetary Policy Report were unambiguously dovish. The outlook for growth and the labour market were downgraded, and inflation is now expected to undershoot the 2% target in 2027 and 2028. Governor Bailey at the post-meeting press conference said the key judgement underpinning the view that there was scope for lower rates reflected diminishing inflationary pressures. Softer demand conditions and an easing labour market are expected to see wage growth continue to ease, while the impact of the National Insurance increase will also fade out.
The RBA hiked the cash rate by 25bps to 3.85% this week, recent data convincing the Board that the economy was more capacity-constrained - and inflation pressures were more persistent - than previously thought. New forecasts in the Statement on Monetary Policy helped shape that assessment. The inflation outlook was raised to be above the midpoint of the 2-3% target band through the next couple of years, with the labour market now expected to be tighter and growth stronger in the near term. A hawkish repricing followed as markets adjusted to the scenario of the RBA potentially hiking twice more this year, up from the single additional hike already priced.
The key shift in the Board's thinking was that there was an excess demand component to inflation overshooting the target (3.6% headline and 3.4% core), adding to the existing pressures from price rises deemed more temporary - such as electricity with government rebates ending. Governor Bullock's comments at the post-meeting press conference and at the parliamentary testimony later in the week indicated the Board will retain its existing strategy, using monetary policy to gradually turn the tide on inflation in order to preserve the labour market. Markets therefore think back-to-back hikes are unlikely, pricing in the next increase in the cash rate for the May meeting. For more on this week's meeting, please see my review here. Also in Australia this week, data updates for December showed a pullback in dwelling approvals (see here) and a widening in the monthly trade surplus (see here).
