The Aussie dollar ended the week on a softer note, even after domestic rate expectations firmed following communications from RBA governors earlier in the week. The softness in the currency was largely driven by souring risk sentiment as the Middle East situation worsened (and oil prices spiked) and US CPI came in a touch above expectations.Sentiment data released midweek painted a soft picture. WMI consumer confidence fell 5.2% in September to 84.4, weighed down by renewed RBA rate hike fears following a stronger than expected July CPI print, alongside rebounding fuel prices that continued to squeeze household budgets. The NAB survey told a similar story, with business confidence slipping to -8 from -6 and conditions falling sharply to -1 from +4, a six year low. Inflation signals within the survey were more mixed, as purchase costs rose 0.1ppt to 2.3% (quarterly growth) while labour costs eased to 1.9% and product prices slipped to 0.8%, pointing to growing margin pressures for firms.Additionally, consumer inflation expectations survey was also released late on in the week, with inflation expectations for September holding at 4.9%. This points to household concerns around persistent price pressures, and adds support that the RBA may need to raise rates further to ensure expectations don’t any further. The bigger story domestically was the shift in tone from the RBA itself. At the AFR Property Summit, Assistant Governor Sarah Hunter said risks to the Bank's inflation forecast remained skewed to the upside, pointing to the sharp rise in global oil prices tied to the Middle East conflict as well as continued strength in domestic rents, dwelling construction costs and market services. She flagged real concern among Reserve Bank staff, warning that "the board may well have to raise interest rates to tackle that" if inflation proves stronger than expected. Deputy Governor Andrew Hauser followed with similar messaging on ABC's 7.30, citing the same three upside risks of the Middle East conflict, the ongoing AI boom and Australia's weak productivity growth, while noting the labour market remains solid and confirming the board will debate a hike this month, though the outcome isn't guaranteed.Taken together, we read this as a clear hawkish bias and it has prompted a change to our own call. We now expect the RBA to hike 25bp in November, taking the cash rate to 4.60%, a shift from our long held view of a hold at 4.35% until mid 2027. Our shift in our view reflects both the recent RBA communication coinciding with a run of data that has surprised to the upside since the August meeting. This includes the Q2 GDP data which was stronger than expected and highlighted strong household consumption. Additionally, July CPI data showed inflation, particularly at the underlying level, has picked up and with productivity growth remaining weak, this his only adds to the pressure on the RBA to act. Having said this, we think a September move is unlikely given the August CPI indicator lands only the day after the meeting, and see the board waiting for both the August and September prints before hiking in November instead. Markets are currently pricing around a 72% chance of when the RBA meets later this month.
Global markets were dominated last week by a broad based sell off in government bonds, with yields pushing to multi year highs even as US Treasury Secretary Bessent continued his bond buyback program. Markets grew cautious ahead of Friday's US CPI print, the last major reading before the Fed's meeting, while a stronger than expected August payrolls report boosted bets on a hike rather than a cut. Fed Chair Kevin Warsh has also turned more hawkish, warning there is still work to do on inflation. Structural pressures are adding to the move too, with large US fiscal deficits and a debt pile above 40 trillion dollars pushing up the term premium on long dated debt. The sell off is global rather than a US story, with yields rising in tandem across other major economies, and the Treasury's own buyback efforts have done little to slow the trend.The key data event of the week was the US CPI release. Headline US CPI rose 0.4% MoM in August, matching consensus, with the annual rate holding steady at 3.4%. However, core inflation increased 0.3% MoM, above the 0.2% forecast, while the core annual rate eased slightly to 2.4%. Energy prices jumped 2.1% MoM, led by a 3.9% surge in gasoline, which also pushed airline fares 2.7% higher. Housing prices (the largest individual component of CPI) remained somewhat benign. The data saw the US dollar firm, as expectations of a Fed rate hike next week rose, with markets now pricing roughly 90% odds of a 25 basis point move.The ECB delivered a widely expected 25bp hike this week, taking its policy rate to 2.50%, and said it remains “vigilant” given the current environment. President Lagarde noted there is no evidence yet of inflation pass through in the euro area, though the Bank expects inflation to stay elevated for an extended period and will continue to assess policy on a data dependent, meeting by meeting basis. The ECB also lifted its inflation projections for 2027 and 2028, to 2.5% and 2.1% respectively, on the back of an upward revision to core inflation. Sources close to the ECB suggested officials expect to raise rates further, with another hike possible as soon as next month.Elsewhere, the Japanese Yen extended its rally, hitting its strongest level in seven months, with USD/JPY briefly touching 153 and surpassing levels following last month intervention. The move in the yen reflects growing conviction that the BoJ will hike rates at next week's meeting, alongside a market view that Japanese authorities remain ready to intervene again if needed. Finally, tensions in the Middle East showed no sign of easing, with Brent crude prices reaching $104/bbl by the end of the week. A fresh round of strikes between the US and Iran has raised concern that flows through the Strait of Hormuz could remain constrained for some time, with both sides appearing to prepare for a protracted conflict rather than a near term ceasefire. That said, there was some reprieve late on in the week after there were reports that Middle Eastern foreign ministers were trying to negotiate a temporary deal with Iran to manage shipping through the Strait of Hormuz. This saw some modest gains for both antipodean currencies late on in the week offsetting only some of their earlier losses.
