Inflation's turn puts rate hikes back on the table
Apollo says US core PCE inflation has sat at 3% for three years and is now moving higher, while NAB and Westpac both expect the Reserve Bank of Australia to hike — and markets price an 80% chance this week.
- Apollo reports core PCE inflation has been at 3% for three years against a 2% target, is currently moving higher, and the market is pricing in more Federal Reserve interest rate hikes. m:…3411
- NAB analyst Sally Auld expects the Reserve Bank of Australia to raise rates by 25 basis points to 4.85%, and Westpac forecasts a November hike, saying inflation in Australia remains too high. m:…4248 m:…4128
- Westpac's morning report says markets price an 80% probability of a hike at this week's Reserve Bank of Australia meeting. m:…2451
- The Bank of Japan left its policy rate unchanged but signalled upside risks to inflation, the yen gained, and NAB notes the Bank of Japan has judged underlying inflation to be consistent with its 2% target for the first time since 2013. m:…2451 m:…4248
- Sentiment was downbeat to end the week as US tech earnings disappointed expectations, global equities moved lower as concerns around the AI trade intensified, and Brent crude posted its highest weekly close since the conflict began on the prospect of further US strikes on Iran. m:…2451
The US turn
Apollo's Torsten Slok puts the US turn plainly: core PCE inflation is supposed to be 2%, but it has been 3% for three years, and it is now moving higher. Apollo reports that the market is pricing in more Federal Reserve interest rate hikes in response, and that the failure to reach the 2% target is driving current market sentiment. The direction of travel has flipped: from disinflation to renewed upward pressure. m:…3411
Australia: a hike priced in
In Australia, the same turn is showing up as a near-certainty. NAB analyst Sally Auld told the Morning Call podcast that the Reserve Bank of Australia is expected to raise rates by 25 basis points to 4.85% at this week's meeting, and Westpac's weekly outlook forecasts a November hike, with inflation still too high. Westpac's morning report adds that markets are pricing an 80% probability of a hike at this week's meeting. NAB also expects the Reserve Bank to downgrade its growth forecasts in its upcoming report. m:…4248 m:…4128 m:…2451
The backdrop, in Westpac's telling, is a week of downbeat sentiment: US tech earnings disappointed expectations, global equities moved lower as concerns around the AI trade intensified, and US technology stocks and tech-exposed Asian markets bore the brunt of the declines. Safe-haven demand supported US Treasuries, Westpac reports, though higher oil prices capped those gains, and the US dollar eased modestly while the Australian dollar was little changed. NAB's Auld says investors are becoming more discerning about the return on investment from large capital expenditure in the tech sector, and NAB notes Intel stock declined 45% in the month of October. m:…2451 m:…4248
The rest of the world's central banks
Elsewhere, the picture is mixed rather than uniform. The Bank of Japan left its policy rate unchanged, Westpac reports, but signalled upside risks to inflation, and the yen gained. NAB notes the Bank of Japan has judged underlying inflation to be consistent with its 2% target for the first time since 2013. NAB also expects the Bank of England to hike rates this week, while Chinese manufacturing and services PMIs are both under 50, indicating contraction. m:…2451 m:…4248
Oil added a further complication: Westpac reports prices advanced on the prospect of further US strikes on Iran, with Brent crude posting its highest weekly close since the conflict began, while higher oil prices and inflation concerns weighed on gold. In Australia, NAB flags a housing market caught between cyclical rate-hike pressure and structural adjustments from federal budget changes — a rare combination of both forces at once. m:…2451 m:…4248
What to watch
The calendar now does the talking. Westpac's weekly outlook lists the coming Australian data — the Reserve Bank decision, the Cotality home value index, a household spending indicator, the goods trade balance, and dwelling approvals — alongside New Zealand's third-quarter labour market surveys, building permits, and wage inflation data, and US releases including nonfarm payrolls, the unemployment rate, and purchasing managers' indexes. The same outlook flags coming China data in the form of Ratingdog manufacturing and services PMIs, euro area CPI, PPI, and retail sales, and global S&P Global manufacturing and services PMIs. The actual outcome of the Reserve Bank meeting, Westpac notes, remains to be determined. But the market has already placed its bet. m:…4128 m:…2451
What is still unresolved
- The actual outcome of the upcoming Reserve Bank of Australia meeting remains to be determined.
- The extent to which the Reserve Bank will downgrade growth forecasts in its upcoming report is not yet known.
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