Key insights from the week that was.
With little domestic data of significance, participants’ attention focused on RBA Deputy Governor Hauser’s fireside chat, which saw an abrupt shift in market expectations of a follow-up rate hike at the November meeting.
Hauser warned in his remarks that the current inflation outlook was “materially worse” than the RBA’s August forecasts. Three upside inflation risks were characterised as having “crystallised” ahead of the September meeting – the Middle East, the AI boom, and domestic supply constraints. Hauser noted the Middle East picture “looks worse” given oil prices are “about a third higher than [the RBA] assumed in August”. He then positioned AI and data centre developments among an “extraordinary sequence of positive demand shocks around the world”, with “higher AI prices, tech prices feeding through into CPI”. Finally, on domestic capacity pressures, the Deputy Governor noted that “inflation’s been coming in at or a little bit above expectations, despite an apparent easing in the labour market”. He went on to state that the staff are currently assessing “whether [the RBA] need to change [its] judgement on capacity pressures in the labour market again” – in other words, revise up their assumption for the NAIRU.
Hauser’s comments prompted a material reassessment of market pricing for a follow-up November hike, from just a 20% chance at the end of last week to a 50/50 proposition today ahead of next week’s Q3 CPI. For that release, we are forecasting a 1.3% (4.1%yr) lift in headline inflation and a 0.9 (3.5%yr) increase in trimmed mean inflation. Our preview provides more detail behind the component mix for Q3 as well as our upward revisions to the preliminary Q4 forecast. Provided inflation prints broadly in line with our expectations, the RBA is likely to hike by 25bp at the November meeting.
Across in New Zealand, consumer prices rose 0.7% in Q3 and annual inflation eased from 4.1%yr to 3.7%yr. Under the surface of this ‘as expected’ read though, several closely watched measures of core inflation took a step higher to now be at or slightly above the top of the RBNZ’s target band. Our NZ economics team consequently expect the RBNZ will raise the OCR 25bps to 3.00% at its October policy review, while retaining a 4.00% terminal OCR forecast for September 2027.
Earlier in the week, China’s economy surprised to the upside in Q3, GDP growth accelerating from 0.9%qtr to 1.2%qtr, lifting annual growth from 4.3%yr to 4.5%yr – keeping authorities on track to achieve their 4.5-5.0% full-year growth objective.
While annual retail sales growth improved in September, rising from 0.4%yr to 1.1%yr, the current pace of growth is only a quarter of the gain seen just a year ago and very weak versus history. Consumer spending continues to be constrained by weak confidence, particularly with respect to employment prospects and wealth. On housing wealth, five years into the property downturn, house prices continue to decline month-on-month and investment remains in a deep downturn, -20.6%ytd.
Total fixed asset investment has been detracting from annual GDP growth since April owing to a lull in high-tech investment, a lack of confidence in future demand amongst domestically oriented businesses as well as property’s malaise. For aggregate growth to hold up through 2027 and 2028 as the contribution from net exports moderates, broad-based stimulus in scale will prove necessary. Expect recent targeted support measures to be broadened and given much greater scale in coming months.
Finally, in the UK, inflation accelerated from 3.1%yr to 3.5%yr in September, exceeding both market expectations and the Bank of England’s July forecast. The surprise was largely driven by energy, fuel prices rising 5.4%mth. However, core inflation also edged up from 2.6%yr to 2.8%yr as services inflation increased from 3.4%yr to 3.7%yr. While not an immediate concern inflation, the labour market showing resilience, the ILO unemployment rate falling from 4.9% to 4.7% in August, suggests demand risks for inflation will need close monitoring as well as supply-side concerns.
Next week will see the focus once again return to the US as the FOMC meet and US Q3 GDP is released. For both events, the implications for risks to the outlook will be the focus. The week after, the US mid-term elections are due.
