Key insights from the week that was.
In the absence of any major data or events in Australia this week, markets continued to ponder the likely timing and shape of the RBA’s easing cycle, eventually pricing in only about two and a half 25bp interest rate cuts by the end of 2025. These developments mirrored the modest changes in global sentiment, but the centre of the debate being on the question of ‘when’ locally versus ‘how fast’ and ‘how much’ interest rates are going to go down globally is a clear point of distinction.
Next week’s Q3 CPI update will prove critical in calibrating local market expectations. Our preview delves into the detail behind our expectations and forecasts for the forthcoming update. In summary, the full roll-out of cost-of-living rebates across the states are set to drive headline inflation back into the target band in Q3 – we forecast 2.9%yr. The RBA will instead be more focused on trimmed mean inflation, to the extent that it will provide a clearer gauge of the true underlying momentum of inflation. We anticipate a constructive development on this front too, with trimmed mean inflation forecast to ease from 3.9%yr in June to 3.5%yr in September.
Should the headline results and general composition from the data print broadly as we expect, we view the inflation dynamics as being most consistent with a February start to the rate cutting cycle. At a pace of 25bps per quarter, we anticipate the cash rate to reach a terminal rate of 3.35% by the end of next year. This end-point is predicated on our view that the global structure of interest rates will be higher than it was pre-pandemic. In this week’s essay, Chief Economist Luci Ellis discusses why reversion to pre-pandemic ‘norms’ might not necessarily be an appropriate baseline.
Late last week, China’s Q3 GDP data came in weak at 4.6%yr, well below the official government’s target. Monthly data for September showed some signs of activity picking up. Industrial production rose 5.4%yr supported by strong growth in chips and EV production. News on consumer spending was also positive, as retail sales accelerated to 3.2%yr, the highest since May, with the government subsidies for consumer goods providing a boost. Meanwhile, property investment and sales continue to decline in the double digits. Looking ahead, the Q4 data will be closely watched for impacts of the stimulus measures announced since late September, with a lift expected to provide the support needed for the economy to reach target growth.
In advanced economies, politics dominated the news flow. Opinion polls in the US suggested that Donald Trump was gaining momentum, with financial markets pricing USD and government bond yields higher. Political uncertainty also increased in Japan, as polls show that the ruling coalition led by the new Prime Minister Ishiba might struggle to secure a majority. This will be a huge departure from the norm as the Liberal Democratic Party has been in power most years since 1955, mostly recently having lost power in 2009. And in the UK, the focus remained on next week’s Budget announcement by the new Labour government, with news reports highlighting the significant challenges for public finances ahead.
Against that backdrop, the global PMIs for October showed that growth momentum in most major economies weakened at the start of Q4. In the euro area, the composite index remained in contractionary territory for a second month, and was down by 0.6pts from the Q3 average. The composite PMI in the UK fell to 51.7, the lowest level for nearly a year, and was consistent with quarterly UK GDP growth of only 0.1%qtr, which represents a sharp slowdown from the first half of this year. Meanwhile, the US PMIs stood out, implying firmer and more stable growth momentum despite the uncertainty ahead of the election. Indeed, the US composite PMI came in at 54.3, slightly higher compared to September levels, and unchanged from the Q3 average. But the FOMC’s Beige Book was more sanguine suggesting that the US economic activity was little changed from its July update. Negative impact from hurricanes to agriculture, tourism and the general business activity in the Southeast was noted, but employment was assessed to have increased slightly. Wage growth was described as modest, and most districts saw slight increases in selling prices.
South of the border, the Bank of Canada accelerated the pace of easing and lowered the target for the overnight rate by 50bp to 3.75%. In its communications, it highlighted that inflation returned to the 2% target falling significantly in the last few months, but lower interest rates are needed to maintain it at that level, in particular given concerns about the weakness in the underlying growth momentum.
