US equities rebounded from last week's falls. The crisis at Nvidia did hold back the Nasdaq; however, it also saw other AI-related stocks rise sharply. Europe saw broad-based gains, but Asia was mixed. However, the week in markets was more about macro-related developments than an equity story. Hawkish comments from Governor Waller and strong inflation data firmed up expectations for Fed rate hikes in December and January. This sent US bond yields surging and lifted the US dollar to its highest level since March last year.
US inflation remained elevated in October. Monthly figures were all that were in the report because the absence of CPI data 12 months earlier amid the government shutdown prevented the BLS from calculating annual rates. Headline CPI came in at 0.4% month-on-month (energy prices lifted 0.7%m/m) and core CPI (excluding food and energy) was 0.3%m/m.
These were only modest upside surprises of 0.1ppt relative to expectations; however, they took on increased weight after Fed Governor Waller had earlier said that a 0.3% figure for core CPI should open discussions for a 50bps rate hike in December. Markets moved to fully price in a 25bps hike in December, up from around an 85% chance beforehand, while in response to Waller's comments, a small probability (10-15%) is assigned to a 50bps hike.
In the UK, the strongest quarterly growth rate was recorded in more than two years. GDP rose by 0.7% in the September quarter and 1.7% through the year. Household consumption (0.6%) and business investment (0.4%) were key growth supports, the latter up 3% over the year, pointing to AI-related capital expenditure. The Bank of England's deputy governor Lombardelli said another rate hike was likely in the near term, while in a speech at the central bank's watchers conference she highlighted that wage pressures posed inflationary risks, despite weaker momentum in hiring and job mobility.
Australia's housing market downturn led to an accelerated decline in housing finance in the September quarter. Total lending contracted by 15.5% in the quarter ($81.2bn), while the total volume of loans approved fell by 15%q/q (111.9k) (see here). This downturn is on track to be larger than the last in 2022-23, even though the RBA was raising rates much more aggressively back then. The key distinction this time the tax changes to negative gearing and capital gains treatment. The totality of rate hikes and tax changes are hitting investors hard, with lending and loan demand in that segment falling by more than 30% in the quarter.
