The Aussie ended the week lower after a choppy run. It slipped on Tuesday as markets read the split RBA vote and the guidance leaning on incoming data as dovish, despite the hike. It then recovered through the middle of the week as the US dollars oftened on the Democratic midterm sweep, which allowed the currency to retrace most of its post RBA losses. That rebound reversed sharply on Friday when the strong US NFP revived expectations of a December Fed hike and lifted the US dollar.As we expected, the RBA lifted the cash rate by 25bp to 4.85%this week, though the decision was far from unanimous, with six members voting to hike and three preferring to hold at 4.60%. The updated forecasts show a materially higher inflation path,with headline CPI now seen at 4.5% by December 2026 compared with 3.6% in August,and trimmed mean at 3.6%compared with 3.3%. The Bank does not see inflation reaching the top of the 2 to 3% target band until late 2027, around three quarters later than previously forecast, as higher fuel prices linked to the Middle East conflict,tighter domestic capacity and strong AI related investment all feed into the outlook.On the labour market, the Board now expects the unemployment rate to rise to 4.7% by December 2026 and to peak at 5.1% by the end of 2028, compared with the 4.8% peak forecast in August.
This suggests to us that the Board is prepared to accept as ofter labour market to return inflation to target, particularly with growth slowing and housing prices having fallen significantly.Indeed, we think markets read the split vote and the guidance leaning on incoming data as dovish as the Aussie sold off after the release. In our view this was a fair near term reaction given the absence of a clear tightening bias, although the upgraded inflation forecasts keep the risks skewed towards further tightening. The forecasts are also conditioned on a cash rate path that sits only slightly above the current level through 2027, which fits our base case that this week’s move completes the cycle. That said, we continue to hold the view that further tightening could still be warranted if the inflation backdrop continues to worsen and the data supports it.Household spending data released after the decision was solid and in our view justified the Board’s call to raise rates.Nominal spending rose 0.6% MoM and 6.8% YoY, helped inpart by higher fuel prices, which suggests households have remained resilient to rate hikes at least through September.Volumes were also very solid inthe quarter, up 0.7% QoQ and 3.2% YoY, a strong result given the growing pressure from higher rates and a slowing housing market.
US midterms were the main focus this week, with the Democrats winning both the House and the Senate.The midterm elections delivered a comprehensive victoryfor the Democrats, who regained control of Congress with wins in both chambers. Forecasts point to at least 245 seats in the House and 54 in the Senate, with a handful ofraces still to be called. Voters turned against PresidentTrump amid broad dissatisfaction with the cost of living,tariffs and the Iran war, and even Republican strong holds such as Texas, Kansas and South Carolina swung to the Democrats for the first time in decades.The dollar eased on the result, with the US DXY fallingaround 0.5% point during Asian trading on Wednesday while the 10 year Treasury yield barely moved. We see the outcome as mildly bearish for the USD but not a game changer. Gridlock should limit the scope for further fiscalstimulus and tax cuts, which could take some heat out ofthe Treasury selloff and narrow the US rate advantage that has supported the dollar.We think the downside will prove limited, as the result was largely priced in and Trump retains his veto, which meansCongress can block new spending but cannot unwindexisting measures. Treasury yields should also stay elevated while the Iran war keeps energy prices and inflation expectations high.Focus then turned to US NFP for October which wasstrong across the board. Payrolls rose 165k against aconsensus of 75k, with 84k of upward revisions to theprior two months, and the unemployment rate slipped to4.1% from 4.2%. Wages also surprised, rising 0.4% MoMand 3.1% YoY compared with expectations of 0.3% and2.9%. Healthcare and education led the gains once again,while manufacturing added 19k jobs and has now created 86k positions over five months after three years ofdecline, helped by cheap domestic energy, heavy techinvestment and, at the margin, tariffs, with leisure and hospitality the main drag. The report revives the case for a December Fed hike, which had slipped to close to a coin toss in recent days but is now back to around 20bp priced,and we continue to expect the Fed to deliver.
Elsewhere The Bank of England also raised its policy rateby 25bps to 4.00%, its first hike since 2023, in a decision that was far more hawkish than expected. All nine MPC members voted to hike versus the 7 to 2 split anticipated,with Mann even arguing for 50bps. Guidance was open ended as we expected, with Bailey saying this should notbe seen as the start of a long sequence of hikes but isunlikely to be the last unless the Middle East conflict is resolved. Greene, Lombardelli and Pill all flagged further tightening, which keeps a February hike firmly on the table. Upgrades to the inflation forecast, which now peaksaround 5% in Q2 2027, and to growth added to the hawkish tone. We think market pricing still looks too aggressive, as Bailey acknowledged that part of the move in the yield curve reflects risk premia rather than expected rates, though another hike in early 2027 looks a good be tunless there is good news on Iran soon. Turning to oil markets, Brent crude prices ended the week near $98/bbl, rebounding from its midweek low of $94/bbl. The earlier sell-off during the week came as traders weighed whether a Democratic sweep could bring the Middle East conflict closer to an end, with Vice President Vance blaming the Republican losses on the war and Democratic leaders pledging to wind it down. The rebound reflected a return to reality, as Iran still controls the Straitof Hormuz and is unlikely to relinquish it, with tanker attacks continuing at close to a record pace and flows through the strait running below 60% of capacity. Saudi Arabia also issued warnings for its Red Sea export hub at Yanbu as Houthi attacks continue. Fuel products remain the tighter part of the market, with Ukrainian drone shitting the Ryazan refinery for the second time this week and US distillate inventories falling below 100 million barrels for the first time since 2003.
