The Aussie ended last week relatively soft. It was choppy early on in the week, with the hawkish RBA minutes offset by as oft NAB business survey. The minutes showed the Board seeing excess demand as larger than it first thought and is open to the neutral rate being higher,with further hikes left on the table. NAB business confidence fell for a third straight month,while its employment index hit a five year low, which in our view sat awkwardly against the RBA’s hawkish tone.However, towards the end of the week, the Aussie experienced a fairly sizeable sell-off driven by a combination of global and domestic factors. The sell-off began with the US CPI release,which surprised to the upside at both the headline and core level,supporting the US dollar post the release.This was then compounded by the weak September labour force survey (LFS) on Thursday.Employment fell 39.3k against expectations of a 19.6k gain,whilst the unemployment rate rose to 4.7%, its highest level since 2021.
The detail in the LFS release was more mixed than the headline. The fall in employment was entirely in part time work,while full time employment and hours worked both rose through the month. In saying this, we continue to view the labour market as showing signs of gradual cooling rather than contracting sharply.In terms of the implications for the RBA, we still think inflation carries more weight than the labour market. The softer print gives the Board more room to wait, but it is not broad enough to take a November hike off thetable on its own. Q3 CPI at the end of October is the key driver.A soft result would make it easier for the bank to hold, while a firm one would keep a hike in play even with a weaker jobs backdrop. We now expect the unemployment rate to peak at4.8% in 2H27. Looking ahead to next week it's fairly light in terms of key data for Australia, with PMI data for October due out on Friday.
US data dominated the week, led by a hot September CPIprint. Headline CPI rose 0.6% MoM, in line with consensus and up from 0.4% prior, which lifted the annual rate to3.7% from 3.4% against 3.6% expected. Core was themore important surprise, rising 0.3% MoM against 0.2%expected and lifting the annual rate to 2.6% from 2.4%.Indeed, on a three month annualised basis, core accelerated to 3.4% from 2.0% - suggesting inflationpressures potentially starting to re-accelerate. Core goods rose 0.3% m/m, led by used vehicles. Shelter rose 0.4%MoM on strength in lodging away from home, while rent rose 0.2% and owner’s equivalent rent 0.3%. PPI data also surprised to the upside, adding to furtherconcerns around the inflation outlook for the US.September PPI rose 1.3% MoM against 0.5% expected, the sharpest gain since early 2022, taking the annual rate to6.3%. Energy costs for producers jumped 10.8% on themonth as the Middle East war fed through, which flowed into transport and warehousing (up 3.4%) and trade services (up 1.4%). Final demand goods rose 2.6% m/m,the largest monthly gain for that category since the seriesbegan in 2009. Additionally, core PPI rose 0.7% MoM andwas up 5% through the year.US retail sales was also released and showed spending holding up in nominal terms but not in real terms. Sales rose 0.8% m/m, driven mainly by higher petrol prices. Exautos and gasoline sales rose 0.2% and the control group 0.1%. Accounting for inflation, spending measures were likely negative in volume terms, which suggests higher fuel costs are eating into household spending power.
For the Fed, this is the last inflation data before the FOMC meets, with PCE due a day after the meeting. Markets price around a 30% chance of a hike this month. We do not expect the Fed to move, but we continue to expect a hike at the final meeting of the year. The data points to a broadening out of the inflation pressures the Fed has been flagging, but we suspect policymakers will want more confirmation before raising rates.In terms of FX movements, the US dollar jumped on the CPI release on firmer Fed hike bets, but gave back some ground late in the week as bond yields fell. Yields dropped sharply after CPI, and the move continued after the stronger PPI, albeit at a more measured pace. It is evident that markets are becoming more concerned around falling Korean and Japanese equity indices and the impact on AI exposed stocks, with fears of a correction in the sector driving a reallocation back into bonds.Turning to oil markets, Brent crude prices ended the week higher as the conflict in the Middle East continued to intensify. Houthi drone and missile attacks on Saudi Arabia hit the headquarters of the state-owned oil producer,though production was not affected. Attacks on tankers inthe Persian Gulf also continued, and Iran’s focus is shifting beyond the Strait of Hormuz, with other vessels across the Persian Gulf being targeted. Adding to this, hopes that the Russia and Ukraine energy ceasefire would ease diesel supply constraints were dashed by further attacks on Russian refineries. Sentiment was also weighed down by the IEA’s latest assessment, which showed global inventories down 10mbbl in September, leaving stocks 509mbbl lower than at the end of February
