Modest gains were post by US equities this week, leaving Asia to stand out where South Korea's KOSPI broke clear of its run of outs to rise more than 11% driven by AI-related stocks. The key data point of the week saw US inflation match expectations, prompting a further reduction of Fed rate hike expectations. There were mixed reactions for FX and bonds. The USD held broadly flat over the week, while yields at the front end of the curve declined slightly but lifted at the longer end as concerns over fiscal pressures remained in focus.
In Australia, the RBA left the cash rate at 4.35% this week as all 9 policymakers supported a hawkish hold. Rates continue to be judged as 'somewhat restrictive', reinforced by recent data on the labour market and inflation that came in weaker than the RBA was expecting and a cooling housing market (see here). Meanwhile, uncertainty in the Gulf was another reason cited to keep watching developments. Reflecting the data, the inflation outlook in the near term was lowered in the August Statement on Monetary Policy.
That was taken in some quarters as a signal that the RBA may not tighten again this cycle; however, inflation is still not projected to return to the midpoint of the target band until early 2028 and Governor Bullock said the Board judged the risks were to the upside. Market pricing puts the odds of another hike by year-end at around 50/50. For more on this week's RBA meeting please see my review here.
US rates pricing for a Fed hike this year were wound back further to around a 33% chance as inflation data behaved following last week's soft labour market data. Inflation in July matched expectations printing at 0.1%m/m/3.4%Y/Y on a headline basis and 0.2%m/m/2.5%Y/Y on a core basis. In addition to avoiding an upside surprise, the report also showed an easing in the pace of services inflation (3.1%) and in housing-related components. In addition to producer price data, forecasts project the core PCE deflator - the key inflation gauge for the Fed - to come in at 0.2%m/m/3.3%Y/Y in July.
