The Aussie has softened further this week as global bond yields keepclimbing and markets brace for the FOMC meeting, where the Fed iswidely expected to raise rates.
Domestically data has been limited, but there was more RBAcommunication yet again, this time from Assistant Governor SarahHunter. Speaking at another fireside chat, she stressed that inflationrisks remain skewed to the upside, citing rising fuel prices stemmingfrom the unresolved Middle East conflict and a global surge in chipdemand tied to the AI boom that is pushing up consumer electronicsprices. Hunter also flagged persistently weak productivity growth as aconcern. On the domestic front Hunter reiterated that the housingmarket correction is unfolding broadly as expected and that householdand business balance sheets currently show no signs of systemic stress,though the Bank's Financial Stability Review due in coming weeks willoffer a fuller picture. Indeed, her comments support our updated outlookthat the RBA will raise rates once more this cycle in November, bringingthe cash rate to 4.60%.
Globally, US 10 year Treasury yields touched 5% earlier this week for thefirst time since 2023, as oil prices surged after Saudi Arabia shut a keypipeline amid the Iran conflict. The rise in yields was also likely reflectinggrowing concerns around rising government debt and heavy borrowingfrom tech firms funding the ongoing AI boom. UK gilt yields also climbedto their highest since 2007, with markets now pricing a near certain Fedhike this week.
On the Middle East, the situation worsened over the weekend as Saudi Arabia closed its East West pipeline, which normally carries around 7 million barrels per day (just under 7% of global daily demand) to Yanbuon the Red Sea and had kept exports elevated despite Iran's closure of the Strait of Hormuz. Reports are mixed on how long the pipeline will stay shut, though US Energy Secretary Chris Wright has played down the concerns and suggested a swift reopening, leaving the market struggling to price the new supply risk, with the outlook also hinging on how much can be drawn from storage at Yanbu. The broader oil outlook remains bleak, with inventories being drawn down across the board, Middle East exports falling sharply, and the US Strategic Petroleum Reserve at it slowest level since 1982, all pointing to continued upward pressure on prices and inflation ahead.
Looking ahead, focus turns to three major central bank meetings this week, the Fed, BoJ and BoE. We expect the Fed to raise rates 25bp on Wednesday, with futures pricing around a 90% probability following the firmer August inflation print, though we see it as a one and done move rather than the start of a fresh tightening cycle, with Chair Warsh likely to keep forward guidance vague. The BoJ is also expected to hike, with markets focused on whether commentary turns more hawkish, as anything softer would disappoint. The BoE, by contrast, are expected tokeep rates steady, with focus also on their post decision commentary.
