Despite a strong start, US equities ended up lower this week, with the reversal sparked by the same concerns around the returns from massive AI-related investment that have gripped the market for months. The USD rose modestly (0.2%) and the Treasury curve was a little steeper. In a raft of central bank meetings, the Fed, ECB, BoJ, and, in a surprise decision, the RBNZ all left rates unchanged. The BoC hiked by 25bps, and the RBA is expected to follow suit next week.
In the US, the Fed left rates unchanged in the 3.75-4% range. While the decision was expected and supported by a large majority of FOMC voters (10-2), broader uncertainty over the Fed's reaction function persists. In every sense, the Fed's messaging is hawkish given inflation remains 'elevated' to its 2% target - data this week showed its preferred core PCE deflator was running at 3.1%yr in September - but the statement said the FOMC opted to wait for 'the accumulation of more information' rather than hiking this week.
This was despite its assessment of economic activity being upgraded from 'solid' to 'strong' as GDP growth accelerated in Q3 by 0.8%q/q and 2.1%Y/Y on the back of surging AI-related spending and resilient household demand. Chair Warsh provided little insight at the post-meeting press conference, emphasising the tightening in conditions following the September rate hike as evidence of its commitment to the inflation target. Warsh also announced a change to the policy schedule from next year. A vote on rates will be removed from one of the 8 meetings in 2027 (and then two in 2028) to allow the FOMC to focus entirely on strategy deliberations.
The ECB left its key rates on hold this week. Growth in the euro area remains resilient, GDP in the September quarter rose by a stronger-than-expected 0.4%q/q and 1.3%Y/Y, though the ECB said that downside risks remain. But upside risks to inflation remain the more prominent concern, with post-meeting reporting quoting ECB sources indicating that a rate hike in December is likely. News of President Lagarde's early departure from the ECB in February, nine months before the end of her tenure, overshadowed the press conference. From a market perspective, the largest impact from the UK autumn budget played out in equities after increases in taxes on banks were smaller than expected.
Pricing for an RBA rate hike next Tuesday rose from around 60% to above 80% this week on the back of hawkish RBA commentary and elevated inflation data for September. Whether it was chief economist Hunter's 60 Minutes appearance or the Senate testimony from the bank's top officials, the key message was that the inflation outlook had worsened recently, requiring more work to bring inflation back to the 2-3% target. Higher fuel and holiday travel costs were key drivers of headline CPI lifting by 1.3% in the September quarter and 3.9% over the year; however, a strong increase in the trimmed mean - the RBA's preferred measure - of 1% quarter-on-quarter and 3.7% year-on-year indicates that price pressures are broadly based (see here).
