The Aussie ended the week largely unchanged, though it found some strength in the middle of the week when local inflation data came in strong. The currency then lost some steam towards the end of the week as risk sentiment soured a touch,with disappointing earnings from key tech companies triggering as harp sel loff in tech stocks and a modest rally in bonds.
Locally, the September CPI printwas the focus and it surprised tothe upside. Headline inflationlifted to 4.3% annually from 4.0%in August, above the consensusof 4.2%. More importantly for theRBA, trimmed mean inflation roseto 3.6% annually in line withexpectations, though it continuesto annualise (on a 3m basis) at4% - which is well above the 2.5%midpoint of the target. Services and domestic inflationalso picked up, with servicesinflation rising to 4.1% annually,and we think the Board will readthe details as confirmation thatinflation is moving further fromtarget rather than closer to it.
Overall, the data cemented ourview that the RBA will raise thecash rate by 25bps to 4.85%when it meets on MelbourneCup Day. This call is also supported byhawkish commentary fromDeputy Governor Hauser andAssistant Governor Hunter, whoboth flagged an inflation outlookthat looks worse than theAugust projections and said theBoard has not yet done enoughdespite four hikes this year. Theminutes of the Septembermeeting pointed the same way,and while the labour market iseasing, we think the weight hasshifted in recent months fromjobs towards inflation. Markets have responded bylifting the probability of a hikefrom 64% ahead of the releaseto 84%, making the decision amuch clearer call.Additionally, markets will also bepaying close attention to theupdated forecasts in the SMPand any guidance on whetherfurther tightening could beexpected. We currently see noscope for more hikes beyondnext week, although additionaltightening could be warranted ifthe inflation backdrop continuesto worsen and the data warrantsfurther hikes.
Global central banks were the main focus this week, led bythe Fed.The Fed held rates at 3.75 to 4.00% as expected, with Governor Cook and Cleveland Fed President Hammack dissenting in favour of an immediate 25bps hike. The statement had a hawkish tilt, with the Fed upgrading its description of economic activity to strong and adding language that we read as a clear nod to a hike in December. Chair Warsh gave no explicit signal, but futures price around an 85% chance of a move at the 8 to 9 December meeting and we continue to expect one more 25bps hike, with limited need for tightening beyond that in 2027. Warsh also announced that a small number of future meetings will be devoted to strategy only with no rate vote, starting with one in 2027, which we see as another step towards dialling back forward guidance.
The decision was followed by stronger GDP data for Q3,which showed the US economy growing an annualised 3.4% against 2.2% in Q2 and a consensus of 3.2%. Growth was largely driven by AI related business investment and resilient spending from higher income households benefiting from stock market gains. The print gives Republicans a welcome boost just days before the midterms, though forecasts and prediction markets still point squarely to Democrats winning the House and favour them in the Senate.The ECB left policy rates unchanged and kept its meetingby meeting approach, with President Lagarde retaining a hawkish bias by noting the Governing Council had considered a hike. The statement did flag that higher government bond yields will weigh on growth and inflation,but market pricing for further hikes was little changed on the day. December remains live, with Lagarde saying the“direction of travel” is clear and the new projections likelyto show higher inflation, so we still expect a 25bps hike in the deposit rate to 2.75% at the next meeting, although weare unconvinced of the need for further tightening in 2027. Lagarde also announced she will leave the ECB in February, with Pablo Hernandez de Cos and Klaas Knotthe fron trunners to replace her.
The BoJ held at 1.25% as widely expected, though the 8 to1 vote saw Takata dissent in favour of a hike to 1.5%,arguing that underlying inflation has reached the price stability target and the Bank needs to move faster towards neutral. The quarterly outlook report left the fiscal 2026 CPI forecast unchanged at 2.5% and noted that core inflation is likely to stay near levels consistent with the target, with risks to prices skewed to the upside.Of the five G10 central bank meetings, the BoC was the only central bank to move rates, raising its overnight rate by 25 bps to 2.5%. The bank pointed to stronger than expected growth, solid consumer spending, a rebound inoil and gas investment and a recovery in sectors hit by US tariffs, which outweighed a rise in the unemployment rate to 6.5%. It also warned that cost pass through could keep inflation more persistent into 2027 and left the door open to further hikes while saying it will proceed carefully, with markets seeing an even chance of another increase in December.On oil markets, Brent crude prices ended the week little changed as diplomatic efforts to end the Middle East conflict stepped up. Diplomacy eased fears of a supply disruption, with Vice President Vance contacting Iran’s security council, and President Trump saying negotiations are ongoing through mediators. Rising Saudi loadings also helped some supply pressures, though Gulf nations were warned earlier in the week to prepare for a short, intense military campaign. Fuel products remain the bigger pressure point, with Ukrainian strikes on Russian refineries compounding the Middle East disruption and inventories drawn down so quickly that the price spike no longer looks temporary.
