Pivot party

Global Markets

Global equities saw reason for optimism last week, helped by a UK U-turn and media reports the Fed will scale back the size of rate hikes in December. Of course, the Fed is still on track to hike by another monster 0.75% next week and is likely to hike by a still large 0.5% in December  – but hey, 0.5% is smaller than 0.75% so it’s time to party!

Exactly why Fed officials saw it fit to leak to the Wall Street Journal that it might scale back the size of rate hikes in December is unclear. One concern may have been growing signs of instability in global bond and currency markets, with the Bank of Japan resorting to intervention to support the Yen, the Bank of England doing contortions to contain the blow out in Gilt yields and even a surge in US bond yields (10-year yields sailing through 4%) on the back of earlier hawkish Fed commentary.

That said, with equities now likely to embark on yet another pivot party, it will undermine the Fed’s desire to tighten financial conditions. December is still a long time away – plenty of time to signal what it may or may not do at that meeting. Meanwhile, US inflation remains stubbornly high, helped by tight labour markets, solid consumer spending and lack of forced selling among home owners holding onto still cheap fixed-rate loans – all of which suggests a recession is still likely needed to break the back of inflation.

Either way, we’re now entering the Fed’s blackout period ahead of next week’s policy meeting – so we’re unlikely to get any corrective hawkish commentary anytime soon.

In the UK, normalcy appears to be returning with the Government reversing its promise to slash taxes and boost the budget deficit.  As also expected, Chinese President Xi Jinping was re-confirmed for an historic third term in office – breaking with tradition of leaders only servicing for 10 years.

In Australia, we learnt from the minutes to the RBA’s meeting earlier this month that the decision to hike by 0.25% rather than the market expected 0.5% was “finely balanced”, and essentially came down to the fact rates had already been lifted aggressively, and time was needed to assess this impact given policy lags. Smaller rate increases also likely meant extending the timeframe over which rate hikes would take place – allowing the public to remain focused on the fight against inflation.

In other news, employment grew by a lot less than expected in September – a mere 0.9k – even though the unemployment rate held steady at 3.5%. With hiring indicators still firm, the weak employment result is either a statistical “rogue number” or a sign of growing labour shortages.

Week Ahead

There are several global highlights this week. For starters, there are Q3 earnings results from some of the US’s major tech giants (Alphabet, Amazon, Apple and Microsoft). We’ll see what the giants say but, so far at least, the current earnings reporting season is once again proving “not as bad as feared”, reflecting a still solid US economy and corporate pricing power.

Key US inflation news is also out, with the September private consumer deflator and Q3 employment cost index on Thursday (US time). These reports are likely to show wage and cost pressures remain uncomfortably high which might well interrupt Wall Street’s pivot party, at least briefly. In Europe, a more economically credible UK Prime Minister (Rishi Sunak) is expected to be announced while the European Central Bank is widely expected to hike rates by a large 0.75% in view of double digit inflation.

After last week’s delay, Q3 Chinese GDP is also due for release on Wednesday – and which is expected to show some bounce back in growth in an albeit still weak economy.

In Australia, the Federal Budget is announced tomorrow night – while there’s expected to be no new net spending, questions remain over whether this is restrictive enough given the still large structural budget deficit and the RBA’s own efforts to slow the economy and reign in inflation. Indeed, Wednesday will also see the release of the Q3 CPI, which is expected to show a still uncomfortably high quarterly gain in core (trimmed mean) inflation of 1.5% (lifting the annual rate from 4.9% to 5.6%).

Have a great Week!

Photo of David Bassanese

Written by

David Bassanese

Chief Economist

David is responsible for developing economic insights and portfolio construction strategies for adviser and retail clients. He was previously an economic columnist for The Australian Financial Review and spent several years as a senior economist and interest rate strategist at Bankers Trust and Macquarie Bank. David also held roles at the Commonwealth Treasury and Organisation for Economic Co-operation and Development (OECD) in Paris, France.

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