The Aussie strengthened overthe week, supported by hawkishRBA rhetoric, before softeningtowards the end of the week asrisk sentiment turned. A broadsell off in technology stocks onconcerns over AI valuationsweighed on risk appetite, while oilprices climbed further followingfresh attacks on Saudi Arabia.Domestic data was limited to theflash PMIs, which pointed to aweak start to Q4. The compositePMI fell to 47.7 from 51.3, itslowest reading since March, asactivity contracted for the firsttime since May. Services drovethe decline, with the indexslipping into contraction at 47.8,although new business continuedto grow at a slow pace.Manufacturing remained incontraction for a second straightmonth, edging up only marginallyto 49.7 from a 21 month low asnew orders fell sharply, and inputcosts rose. The data was overshadowed by ahawkish speech from DeputyGovernor Andrew Hauser onWednesday. Hauser warned thatthe inflation outlook hasworsened materially relative tothe bank’s August projections,citing oil prices running around athird above its assumptions andrising technology costs tied to AIand data centre construction. He also flagged that the breadthof price pressures will also weighheavily in the Board’s thinking,with liaison showing more firmspassing on higher costs and agrowing share treating inflation of3 to 3.5% as the new normal.
Hauser also acknowledged thatpolicy is working, with the labourmarket easing and consumptiongrowth tepid, and noted thatstaff forecasts are still beingfinalised, but suggested the Q3CPI would likely confirm thedeterioration in the outlook.Assistant Governor Sarah Hunterechoed this in a 60 Minutesinterview on Sunday, saying theBoard has not yet done enoughdespite four hikes this year, withmore of the oil shock still to flowthrough to prices. She alsoplayed down recession risks,seeing no signs of a downturnand framing the housing slumpas policy working, which in ourview keeps a November hikefirmly on the table.Looking ahead, the focus thisweek is squarely on theSeptember monthly and Q3 CPIrelease on Wednesday. Forheadline inflation, we expect a0.35% MoM rise (0.2% SA),easing the annual rate modestlyto 3.9% and implying a 1.1% QoQgain. For trimmed mean weexpect a 0.25% MoM rise withthe annual rate holding at 3.6%,implying a 1% QoQ increase. Inour view, a quarterly pace ofthat magnitude would situncomfortably with the Boardgiven its recent hawkishnessand focus on building inflationpressures, and a print in linewith or above our forecast wouldlikely see the RBA raise rateswhen it meets on Tuesday 3November. Markets are currentlypricing a 60% chance of aNovember rate hike.
It was a relatively quieter week on the global data front,with inflation releases in the UK and Japan the main focus,and both continued to point to building inflation pressuresacross the two economies.UK CPI surprised to the upside in September, rising 0.4%MoM and lifting the annual rate to 3.5%, ahead ofexpectations of 0.3% and 3.4%, while core inflationclimbed to 2.8% from 2.6%. The firmer print adds tobuilding inflation pressures in the UK, which in our viewcould push the BoE to raise rates later this year.In Japan, headline CPI rose to 2.1% YoY in September from1.9%, while core inflation, which excludes fresh food,jumped to 2.1% from 1.7% and the measure excluding freshfood and energy climbed to 2.4% from 1.9%. With coreinflation now above the BoJ’s 2% target, the data gives theBank further impetus to keep raising rates. We expect twomore hikes this cycle, though not at this week’s meeting,with one likely before the end of the year and another inthe first quarter of 2027. We do, however, expect the BoJto revise its inflation forecasts higher this week given theescalation in the Middle East conflict and the resulting risein oil and petrol prices.Turning to bond markets, US Treasuries and GermanBunds reclaimed their safe haven status as the sell off intechnology stocks resumed, pulling yields lower. Frenchdebt was the clear exception, with the 10 year OAT/Bundspread widening by more than 15bp to 175bp, approachingthe 191bp peak reached during the euro zone debt crisis,as recent protests, the 2027 budget debate and nextyear’s presidential election keep political risk firmly infocus.
More broadly, the deterioration in risk sentiment highlightshow fragile markets remain in a rising rate environment,and with the Fed and ECB both meeting this week, recentvolatility will likely feature in policymakers’ deliberations.Brent crude extended its climb this week, finishing at $117/bbl as escalating hostilities in the Middle East stoked fearsof further supply disruptions. The Iran backed Houthisstepped up their campaign against Saudi Arabia, with adrone strike on Aramco’s Shaybah field killing two people,followed by attacks on the port of Yanbu late in the weekthat the group also claimed. The strikes prompted the USto pull some personnel and their families from itsdiplomatic missions in the kingdom. Oil output has so farbeen largely unaffected, but the growing focus on energyinfrastructure, alongside ongoing Iranian attacks onshipping in the Strait of Hormuz, points to a rising risk ofdisruption.Looking ahead, it is a busy week for central banks, withfive G10 banks meeting (the Fed, ECB, BoJ, BoC andRBNZ). Of these, we expect the RBNZ to hike, as outlinedin our preview, and see a good chance the BoC followssuit, with market pricing around an 80% chance of a move.Even where rates are left on hold, we expect hawkishmessaging across the board given the recent rise ininflation across developed economies.
