Opposing tensions in global bond markets made for a volatile week, giving renewed strength to the safe-haven US dollar, sending the DXY index to year-to-date highs. Key US data on inflation and the labour market came in weaker than expected, while influential New York Fed President John Williams indicated there was no urgency for another rate rise. That cut market odds for a Fed October rate hike sharply - falling from 70% to 15% - sparking a rally at the front end of the Treasury curve. Declining oil prices also played a role, driven not by diplomatic breakthroughs buy by increased supply through the Gulf and Europe's reserve releases. Pressure remained firmly on long-duration yields. US 10- and 30-year yields pressed new highs since 2002 amid ongoing supply and deficit concerns. That was particularly evident in Europe where plans from the government in France to reduce borrowing failed to inspire confidence. The spread between 10-year French and German bonds hit its widest since the 2011 debt crisis.
In the US, the Fed's benchmark inflation measure slowed from 3.3% to 3%yr in August - still well above target (2%) but printing below expectations to remain unchanged. Meanwhile, the labour market also underwhelmed as nonfarm payrolls rose by just 29k in August, a downside miss on the 90k consensus as revisions reduced employment by 60k in the prior two months. That saw the unemployment rate push back up to 4.2% after spending July and August at 4.1%; however an uplift in the participation rate (61.8%), a 4-month high, was a factor. Rounding out the report, wages growth was modest (3%yr), indicating inflationary pressures from the labour market remain subdued.
Higher energy prices saw inflation in the euro area lift from 3.2% to 3.8%yr in September, a 3-year high. Despite this, markets see only around a 10% chance of an ECB rate hike later this month, influenced by widening bond spreads - though pricing still points to a better than 50/50 chance of another 25bps increase before year-end. ECB President Largarde, said the central bank remained focused on guarding against second-round effects on inflation from higher energy prices but needed to be mindful of the impacts on growth from tighter policy.
Domestically, the RBA increased the cash rate by 25bps to 4.6% this week - its fourth rate hike of the year (see here). The Monetary Policy Board remains open to raising the cash rate further after retaining its guidance in the decision statement. Inflation data was elevated in August (see here) showing headline CPI lifted from 3.5% to 4%yr and core CPI holding at 3.6%, suggesting all upcoming meetings are live. However, markets think the RBA will now move to wait-and-see mode after effectively pulling forward the rate hike that was previously expected next month to this week. The post-meeting press conference from Governor Bullock shaped that view, with market pricing for another hike this year falling below 50%.
