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Dollar's post-CPI rally faltered quickly, as risk sentiment staged a historic U-turn. For now, Sterling is the strongest one for the week on rumors that UK Prime Minister Liz Truss is going to reverse the mini-budget. New Zealand Dollar is the second strongest, followed by Euro. Yen remains the worst performer despite sign of intervention. Australian Dollar is the next worst, followed by Swiss Franc. The greenback is mixed for now, awaiting retail sales data from the US.

Technically, both EUR/JPY and GBP/JPY has resumed their near term rebounds from 137.32 and 148.93 respectively. Further rally would be seen towards 145.62 and 169.10 highs. But the question remains on what Japan would do with USD/JPY close to 1998 high, and the impact on other pairs. That is, if USD/JPY is knocked down again, would other Yen crosses follow, or Dollar is sold off instead?

In Asia, Nikkei closed up 3.25%. Hong Kong HSI is up 2.59%. China Shanghai SSE is up 1.93%. Singapore Strait Times is up 0.68%. Japan 10-year JGB yield is down -0.0018 at 0.249. Overnight, DOW rose 2.83%. S&P 500 rose 2.60%. NASDAQ rose 2.23%. 10-year yield rose 0.0050 to 3.952, after hitting as high as 4.080.

No reversal yet after DOW's 1500 historic U-turn

US stock staged a historic U-turn overnight, after initial post-CPI selloff. DOW had a jaw-dropping swing of more than 1500 pts, falling to as low as 28660.94, then rebounded to close at 30038.72, after hitting intraday high at 30168.54. There is no convincing explanation to the reversal. Some said investors saw the set of data as a "last gasp" for rising inflation. But after all, Fed is set to continue with aggressive tightening and there is no clear sign on where interest rate would really peak.

Anyways, immediate focus is now on 30454.46 resistance in DOW. Firm break there will complete a double bottom pattern, and bring stronger rebound through 55 day EMA (now at 30914.85) in the near term. Rejection by 30454.46 should set the stage for resuming the down trend through 28660.94 later in the month.

In either case, there is no clear sign of trend reversal for now, and the whole pattern from 36965.83 should still extend to 100% projection of 36965.83 to 29653.29 from 34281.36 at 26982.00 before completion.

Japan didn't confirm intervention after unusually USD/JPY volatility

There was some unusual volatility in USD/JPY overnight at it approached 1998 high at 147.68. The pair was knocked down but there was no sustained selling. Japan Ministry of Finance declined to confirm whether that was caused by intervention.

Meanwhile, Finance Minister Shunichi Suzuki just reiterated that government's readiness to take "appropriate action" against "excessive volatility" in the markets. He said, "we cannot tolerate excessive volatility driven by speculative moves. We're watching market developments with a strong sense of urgency."

Separately, BoJ Governor Haruhiko Kuroda maintained that "raising rates now is inappropriate in light of Japan's economic, price conditions." He added that "pace of Japan's economic recovery still slow so BoJ must continue supporting economy."

NZ BNZ manufacturing dropped to 52.0, positive trend with ongoing volatility

New Zealand BusinessNZ Performance of Manufacturing Index dropped back from 54.8 to 52.0 in September, comparing to July's 53.5 and June's 50.2. Looking at some details, production dropped from 54.5 to 52.0. Employment dropped from 53.6 to 51.9. New orders tumbled sharply from 59.7 to 48.4. Finished stocks rose from 52.0 to 55.0. Deliveries edged down from 55.0 to 54.5.

BNZ Senior Economist, Doug Steel stated "the overall trend remains positive, but with ongoing volatility around it. On the positive side, the PMI's 3-month moving average has continued to edge higher this month but, not so good, the 52.0 monthly reading is now back below the PMI's longer-term norm".

Looking ahead

Eurozone will release trade balance today. But focus will be on US retail sales, while import price, U of Michigan consumer sentiment and business inventories will be featured. Canada will publish manufacturing sales and wholesale sales.

AUD/USD Daily Report

Daily Pivots: (S1) 0.6206; (P) 0.6261; (R1) 0.6352; More...

In temporary low is formed at 0.6169 in AUD/USD, just ahead of 100% projection of 0.7660 to 0.6680 from 0.7135 at 0.6155. Intraday bias is turned neutral first but outlook will stay bearish as long as 0.6539 resistance holds. Firm break of 0.6155 will target 138.2% projection at 0.5781. Nevertheless, firm break of 0.6539 will confirm short term bottoming and bring stronger rebound.

In the bigger picture, down trend form 0.8006 (2021 high) is expected to continue as long as 0.6680 support turned resistance holds. Next target is 0.5506 low. Medium term momentum will now be closely monitored to gauge the chance of break of 0.5506.

Economic Indicators Update

GMT	Ccy	Events	Actual	Forecast	Previous	Revised
21:30	NZD	Business NZ PMI Sep	52		54.9	54.8
23:50	JPY	Money Supply M2+CD Y/Y Sep	3.30%	3.40%	3.40%
01:30	CNY	CPI Y/Y Sep	2.80%	2.80%	2.50%
01:30	CNY	PPI Y/Y Sep	0.90%	1.10%	2.30%
09:00	EUR	Eurozone Trade Balance (EUR) Aug		-40.0B	-40.3B
12:30	CAD	Manufacturing Sales M/M Aug		-1.10%	-0.90%
12:30	CAD	Wholesale Sales M/M Aug		0.10%	-0.60%
12:30	USD	Retail Sales M/M Sep		0.20%	0.30%
12:30	USD	Retail Sales ex Autos M/M Sep		-0.10%	-0.30%
12:30	USD	Import Price Index M/M Sep		-1.10%	-1.00%
14:00	USD	Michigan Consumer Sentiment Index Oct P		58.8	58.6
14:00	USD	Business Inventories Aug		0.90%	0.60%

USD/JPY:

The current general bias for USDJPY on the H4 chart is bullish. To add to this bias, the price is currently trading above the Ichimoku cloud, indicating a bullish market. Overnight, the price has maintained its strong bullish momentum and tapped onto the first resistance line at 147.410, which contains the 127.2% Fibonacci extension line. Price is currently consolidating there. If this strong bullish momentum continues, expect price to continue towards 149.313 level where the 161.8% Fibonacci extension is located.

Areas of consideration:

• H4 time frame, 1st resistance at 147.410
• H4 time frame, 2nd resistance at 149.313
• H4 time frame, 1st support at 145.90

DXY:

On the H4 chart, prices are moving in an ascending trend signalling an overall bullish momentum. Prices are moving towards the first support at 110.084 where the swing low sits. if it breaks this level, bearish momentum will bring price to second support at 107.669. Alternatively, price could move up to test the first resistance at 114.759 where the previous swing high sits. If bullish momentum continues it will bring price to 115.717 where the 78.6% projection.

Areas of consideration:

• H4 time frame, 1st resistance at 114.759
• H4 time frame, 1st support at 110.084

EUR/USD:

On the H4, price is moving within the descending trendline in a descending manner, with the price moving below ichimoku cloud- we are still overall bearish biassed. Although price has bounced off the first support at 0.9695 where the 61.8% retracement sits, it could still break this level and bring price to second support at 0.9545 where the swing low and 161.8% extension sit. Alternatively, price may test the first resistance at 1.0047 where the 78.6% retracement sits. If price breaks this level, it may test the second resistance at 1.0194, where the previous swing high sits

Areas of consideration :

• H4 1st resistance at 1.0047
• H4 2nd resistance at 1.0194

GBP/USD:

On the H4, price has rejected the first support and is moving in an ascending trend hence we are slightly bullish bias- if price breaks the first support at 1.0915 where the 50% retracement sits, bearish momentum will bring price to the second support at 1.0355 where the previous swing low sits. Alternatively price can test the first resistance at 1.1437 where the 78.6% retracement and overlap resistance sit. Subsequently the second resistance at 1.1739

Areas of consideration:

• H4 1st support at 1.0915
• H4 1st resistance at 1.1437

USD/CHF:

USDCHF is in a strong bullish trend on the H4 chart. Price is trading above the Ichimoku cloud signalling a bullish trend. Price has tested the first resistance at 1.0046 where the previous swing high sits and it’s pulling back slightly. If bearish momentum continues, price can test the first support at 0.9868 where the overlap support and 23.6% retracement sits then the second support at 0.9757 where the 50% retracement sits

Areas of consideration

• H4 1st support at 0.9868
• H4 1st resistance at 1.0046

XAU/USD (GOLD):

On the H4, after the significant rise, the price is showing a pullback trend now, the 1st support is still held at 1660.410, which is in line with the 61.8% fibonacci retracement and overlap support. As the price is within the descending channel, we can expect the price to break 1st support and drop to the 2nd support at 1616.073, where the swing low is. Alternatively, the price may bounce off from the 1st support and rise to test the 1st resistance at 1729.880, where the 61.8% fibonacci retracement and previous swing highs are.

Areas of consideration:

• H4 time frame, 1st support at 1660.410
• H4 time frame, 2nd support at 1616.073

AUD/USD:

On the H4, the price is bouncing off from the 1st support, as the stoch is testing the 1st resistance,we are looking the price rise to test the 1st resistance at 0.63976. Alternatively, as the price is below the descending trendline and ichimoku cloud, the price may drop to the 1st support at 0.62085, which is in line with the 61.8% fibonacci projection. If the 1st support is broken, the 2nd support could be at 0.61072, where the 78.6% fibonacci projection is.

Areas of consideration

• H4, 1st support at 0.62085
• H4, 1st resistance at 0.63976

NZD/USD:

On the H4, the price is crossing the ichimoku cloud and RSI is rising over 50, we have a bullish bias that the price may rise to test the 1st resistance at 0.56862, where the 50% fibonacci retracement is. If the 1st resistance is broken, the 2nd resistance could be at 0.58119, which is in line with the 38.2% fibonacci retracement and overlap resistance. Alternatively, the price may drop to test the 1st support at 0.55338, which is in line with the swing low.

Areas of consideration:

• H4 time frame, 1st resistance at 0.56862
• H4 time frame, 2nd resistance at 0.58119

USD/CAD:

On the H4, the price trades higher near the 1st resistance of 1.4033 which is the previous swing high and 61.8% projection level. With the price trading above the ichimoku cloud, we have a short term bullish bias. The price could break the first resistance to test the second resistance at 1.4186 where the 78.6% projection sits. Alternatively it could fall to the 1st support at 1.3828 where the previous swing high sits subsequently the second support at 1.3495 where the 50% retracement sits

Areas of consideration:

• H4 time frame, 1st resistance at 1.4033
• H4 time frame, 1st support at 1.3828

OIL:

Looking at the H4 chart, the current overall bias for Oil is bullish . To add confluence to this bias, the price is currently above the Ichimoku cloud which indicates a bullish market. Overnight, price broke through the 1st support line at 93.381 where the 78.6% Fibonaaci line and 38.2% Fibonaaci line was located before going back up above it. If this bullish momentum continues, expect the price to head towards the 1st resistance at 96.538 where the 100% Fibonacci line and 0% Fibonacci line are located for a retest.

Areas of consideration:

• H4 time frame, 1st resistance at 96.538
• H4 time frame, 1st support at 93.381

Dow Jones Industrial Average:

The current overall bias for DJI is bearish, according to the H4 chart. To add to this bias, the price is currently trading below the Ichimoku cloud, indicating a bearish market. Price had strong votality overnight due to the release of the US CPI data with price going down to test the 2nd support at 28715.85 where the previous low and 0% Fibonacci line is located. Price then closed above the 1st support at 29653.29 where the previous low and 100% Fibonacci line is located. If this short term bullish momentum continues, expect price to possibly head back up to test the 1st resistance at 30982.97 where the 38.2% Fibonacci line is located.

Areas of consideration:

• H4 time frame, 1st support at 29653.29
• H4 time frame, 2nd support at 28715.85
• H4 time frame, 1st Resistance at 30982.97

DAX:

On the H4, as the price is crossing ichimoku cloud, we can expect the price to test the 1st resistance at 12668.06, which is in line with the 50% fibonacci retracement, 78.6% fibonacci projection and overlap resistance. After testing the 1st resistance, as the price is below the descending trendline, the price may drop to the 1st support at 11874.07, which is in line with the swing low.

Areas of consideration:

• H4 time frame, current price
• H4 time frame, 1st resistance at 12668.06

ETHUSD:

Looking at the H4 chart, the current overall bias for ETHUSD is bearish. To add confluence to this bias, the price is currently under the Ichimoku cloud which indicates a bearish market. Overnight, the price continued its bearish momentum downwards and went through the 1st support line at 1220.00, where the 0% Fibonaaci line is located, before reflecting back up. Expecting price to continue consolidating between the 1st support and 2nd resistance.

Areas of consideration:

• H4 time frame, 1st resistance of 1405.86
• H4 time frame, 1st support at 1220.00

BTCUSD:

On the H4, price is showing a descending trendline and below the ichimoku cloud, we can expect the price drop to test the 1st support at 18220.96, which is in line with the swing lows and 61.8% fibonacci projection. If the 1st support is broken, we can expect the price to drop to the 2nd support at 17478.87, where the previous swing low is. Alternatively, the price may rise to the 1st resistance at 20427.23, where the overlap resistance and 50% fibonacci retracement are.

Areas of consideration:

• H4 time frame, 1st support at 18220.96
• H4 time frame, 2nd support at 17478.87

S&P 500:

Based on the H4 chart, the current overall bias for the S&P500 is bearish. To add to this bias, the price is currently below the Ichimoku cloud, indicating a bearish market. Overnight, the price shot back up above the 1st support at 3636.87 where the 100% Fibonacci line and previous low is located due to the release of the US CPI data. If this short term bullish momentum continues, expect price to possibly head towards the 1st resistance at 3910.74 where the 38.2% Fibonacci line is located.

Areas of consideration:

• H4 time frame, 1st support at 3636.87
• H4 time frame, 1st resistance at 3910.74

New Zealand BusinessNZ Performance of Manufacturing Index dropped back from 54.8 to 52.0 in September, comparing to July's 53.5 and June's 50.2. Looking at some details, production dropped from 54.5 to 52.0. Employment dropped from 53.6 to 51.9. New orders tumbled sharply from 59.7 to 48.4. Finished stocks rose from 52.0 to 55.0. Deliveries edged down from 55.0 to 54.5.

BNZ Senior Economist, Doug Steel stated "the overall trend remains positive, but with ongoing volatility around it. On the positive side, the PMI's 3-month moving average has continued to edge higher this month but, not so good, the 52.0 monthly reading is now back below the PMI's longer-term norm".

Full release here.

There was some unusual volatility in USD/JPY overnight at it approached 1998 high at 147.68. The pair was knocked down but there was no sustained selling. Japan Ministry of Finance declined to confirm whether that was caused by intervention.

Meanwhile, Finance Minister Shunichi Suzuki just reiterated that government's readiness to take "appropriate action" against "excessive volatility" in the markets. He said, "we cannot tolerate excessive volatility driven by speculative moves. We're watching market developments with a strong sense of urgency."

Separately, BoJ Governor Haruhiko Kuroda maintained that "raising rates now is inappropriate in light of Japan's economic, price conditions." He added that "pace of Japan's economic recovery still slow so BoJ must continue supporting economy."

US stocks staged a historic U-turn overnight, after initial post-CPI selloff. DOW had a jaw-dropping swing of more than 1500 pts, falling to as low as 28660.94, then rebounded to close at 30038.72, after hitting intraday high at 30168.54. There is no convincing explanation to the reversal. Some said investors saw the set of data as a "last gasp" for rising inflation. But after all, Fed is set to continue with aggressive tightening and there is no clear sign on where interest rate would really peak.

Anyways, immediate focus is now on 30454.46 resistance in DOW. Firm break there will complete a double bottom pattern, and bring stronger rebound through 55 day EMA (now at 30914.85) in the near term. Rejection by 30454.46 should set the stage for resuming the down trend through 28660.94 later in the month.

In either case, there is no clear sign of trend reversal for now, and the whole pattern from 36965.83 should still extend to 100% projection of 36965.83 to 29653.29 from 34281.36 at 26982.00 before completion.

Key Highlights

• USD/JPY rallied further and traded to a new multi-year high above 147.00.
• A major bullish trend line is forming with support at 146.50 on the 4-hours chart.
• Gold and oil came under pressure after the US CPI report.
• The US CPI increased 8.2% in Sep 2022 (YoY), more than the forecast of 8.1%.

USD/JPY Technical Analysis

The US Dollar started a fresh increase above the 145.00 resistance against the Japanese Yen. USD/JPY traded to a new multi-year high and even cleared the 147.00 level.

Looking at the 4-hours chart, the pair settled well above the 145.00 level, the 100 simple moving average (red, 4-hours), and the 200 simple moving average (green, 4-hours).

There was a clear move above the 147.00 and 147.20 resistance levels. Besides, the pair spiked higher after the US CPI data was released. The market forecast was +8.1% in Sep 2022, compared with the same month a year ago.

However, the CPI increased 8.2% in Sep 2022, less than the last 8.3%. The pair spiked higher and cleared the 147.50 level to set a new multi-year high.

If the bulls remain in action, the pair may perhaps rise above the 148.00 level. The next major resistance is near the 148.50 level. A clear move above the 148.50 level might send the pair towards the 150.00 level. The next major hurdle could be near the 152.00 level.

On the downside, an initial support is near the 146.20 level. The main support sits at the 145.50 level. There is also a major bullish trend line forming with support at 146.50 on the same chart. A downside break below the 145.50 zone might send the pair towards the 144.20 level.

Looking at gold price, there was a sharp bearish reaction after the US CPI data and the price declined below the $1,650 support zone, but later recovered.

Economic Releases

• US Import Price Index for Sep 2022 (MoM) – Forecast -1.1%, versus -1.0% previous.
• US Export Price Index for Sep 2022 (MoM) – Forecast -1.0%, versus -1.6% previous.
• US Retail Sales for Sep 2022 (MoM) – Forecast +0.2%, versus +0.3% previous.

The Westpac Melbourne Institute Index of Consumer Sentiment only fell by 0.9% from 84.4 to 83.7 in the October Survey.

The Index remains in deeply pessimistic territory but could have been much weaker.

As discussed when we released the results of the survey we examined the two samples over the four day period.

The first sample (covering the responses on day 1 of the survey) preceded the RBA's decision to raise the cash rate by 25 basis points. The second sample covered responses which followed the rate decision.

The first sample (sample of 476) showed a Sentiment Index of 77.4 – down 8.3% from the September print of 84.4.

But the Index for the second sample (a sample of 724) printed an Index of 88.7 (up 5.1% on the September print). The difference between the two surveys represented a turnaround of 14.7%.

The turnaround in housing market confidence was even more spectacular. The first sample measure for the Westpac Melbourne Institute Index of House Price Expectations showed a 16% fall in the Index while the second sample showed a lift of around 8% relative to the September print.

This spectacular change in the Index is very likely attributable to the Reserve Bank's decision to raise the cash rate by "only" 25 basis points despite market pricing that gave a probability of around 90% to an increase of 50 basis points.

In my 30 years following RBA policy and markets I cannot recall the RBA moving against market expectations when the probabilities have been so high.

The key indicator for the Sentiment survey was the media reports which took the lead from market pricing and signalled a very confident expectation to the public that a further 50 basis point move was to be expected.

We can congratulate the Board for a courageous decision while pointing out some likely unintended consequences.

Westpac had expected a 25 basis point move until we were obliged to lift our forecast for the terminal federal funds rate by 125 basis points to accommodate a much more aggressive guidance from the FOMC and upside surprises on US inflation.

In lifting our forecast for "global rates" by 125 basis points we lifted our terminal rate for the RBA cash rate by 25 basis points to 3.6%, with the upward adjustment coming in October – a 50 basis point move instead of our earlier preference for 25 basis points.

Because the Australian economy is much more sensitive to the cash rate than is the US economy to the federal funds rate it is not appropriate to follow the full lift in FOMC pricing.

The major adjustment came in our AUD/USD forecast with a US7¢ cut in the likely exchange rate by end 2022 to USD0.65.

With the surprise 25 basis point move the market lowered its terminal cash rate by around 50 basis points. Central banks like to see the markets doing their job for them so a fall in the fixed rates only adds to the task of easing demand pressures.

From our perspective that price response was a surprising reaction to the decision from the RBA and an unintended consequence of the decision.

We observe from the confidence turnaround in the Sentiment survey the RBA decision has provided a short term boost to confidence that is likely to delay the slowdown in demand which will be necessary to constrain demand and inflation pressures.

The key for central banks at this stage of the inflation cycle is to slow demand overall including the demand for labour so that businesses question whether their recent successes in raising their prices, particularly to restore margins, can be sustained or whether they can proceed with plans to increase prices.

Without that hesitation the RBA will fail to wring the inflation pressures out of the system.

Questioning the sustainability of demand will also be consistent with questioning the need to boost employment plans – this is at a time when the labour market is the tightest in 50 years. Currently, labour supply cannot adjust quickly enough to contain wages pressures – thus labour demand needs to slow.

Tight labour market conditions emerged during the pandemic, associated with the national border "closure" – with restrictions on the inflow of people (labour supply) more stringent than those for the outflow. Net immigration averaged around plus 240,000 before Covid and over the two years during the pandemic Australia experienced outflows of around 120,000 – a net loss of around 600,000 people. This was at a time when fiscal and monetary stimulus was boosting demand exacerbating the employment shortfall.

The third unintended consequence of the RBA surprise has been an unexpected further collapse in the AUD to around USD0.625 from USD0.65 before the announcement.

That can be expected to heap further pressure on inflation, adding upside risks to the RBA's current forecast of 7.75% by end 2022 and, potentially, its 2023 forecast.

And the fourth unintended consequence is that a decision to speed up rate increases back to 50 basis points would now be particularly dangerous.

Just as we saw an overreaction in confidence from a positive shock the impact of a larger tightening than expected is likely to be too damaging from the RBA's perspective.

The RBA has not ruled out returning to "50's" should the data so demand although we think the hurdle to going by 50 now will be very high.

At the time of the announcement, we interpreted these likely unintended consequences as justifying no change to our terminal rate of 3.6% but extending the length of the tightening cycle.

We have extended our estimate of the end of the tightening cycle from February to March.

As discussed, that would be consistent with activity holding up for longer given the boost to confidence of the policy pivot.

Consequently, we now expect 25 basis point moves in November; December; February (no meeting in January) and March.

We still expect that achieving a terminal rate of 3.6% will be sufficient to slow growth in the economy from 3.4% for 2022 to 1.0% in 2023.

Activity may hold up a little better in the first half of 2023, given a little more momentum in 2022, resulting from the lower rate profile, to be followed by a more rapid slowdown in the second half.

Any risks of consecutive negative growth quarters would centre on the second half of 2023 rather than the first half, although that "recession" scenario is not our central case.

If our four percentage point down swing in inflation in 2023 does not appear to be materialising (and that has to be a central risk) then we expect that the RBA will have to raise the terminal rate even further – certainly a more likely scenario than trying to fine tune inflation with a more benign rate cycle and a stronger growth outcome.

The Role of the Neutral Rate

Our view has been that the "handbook" for central banking is, when it becomes necessary to contain an inflation shock at the same time policy is clearly stimulatory the strategy is to quickly return the cash rate to "neutral" and then move more slowly.

In previous speeches the RBA Governor has identified "neutral" to be at least zero real, where the nominal component is best assessed as long term inflationary expectations- around the policy target of 2.5%.

The guideline we have been working with is minimum neutral is 2.5%.

The cash rate is now 2.6% so policy is just now in the neutral region.

On October 12, RBA Assistant Governor (Economic) Ellis delivered an important speech on measures of neutral.

She nominates a range of "neutral" from negative 0.5% real to positive 2.0% real - with her various models indicating a central tendency of around 1% real, (or 3.5% nominal).

But neutral is described in terms of the long term. It is the rate which is consistent with the economy holding at trend growth and inflation at the inflation target.

Ellis concludes "The neutral rate is an important guide rail for thinking about the effect policy might be having. It is not necessarily a prescription for what policy should do."

This indicates that neutral is a long term concept whereas actual policy will be buffeted by short term shocks.

It is a similar approach to when Chairman Greenspan was asked where he saw neutral. He answered along the lines of "I will tell you when we are there" or even after we have been there.

Nevertheless, it does now seem that the Bank has a concept of neutral that is likely to be around where we are today if not a little higher.

For other reasons we discussed above that points to the shift to 25 basis point moves being the most likely outcome.

Key insights from the week that was.

Global inflation and its consequences for real income and interest rates were (yet again) the near sole focus of market participants this week. For Australia, the lens was our own Westpac-MI consumer sentiment survey. For the world, it was the latest IMF World Economic Outlook and, of course, the September US CPI report.

Beginning in Australia, despite a smaller than expected increase in the cash rate this month by the RBA (25bps instead of 50bps), Westpac-MI Consumer Sentiment remained deeply pessimistic in October, falling 0.9% to 83.7 – a historically-weak outcome. The available split of pre and post-RBA responses highlights that consumers viewed the smaller increase by the RBA as a material positive, with sentiment amongst those surveyed after the decision almost 15% higher. Nonetheless, with Westpac still expecting the cash rate to peak at 3.60% in March 2023, it is clear that interest rates will continue to place significant pressure on consumer sentiment for an extended period, particularly their views on family finances and housing. This headwind is in addition to the loss of real discretionary spending capacity from historic inflation.

Chief Economist Bill Evans provided a detailed discussion of these themes and other salient consumer sentiment trends in his video update this week; sentiment is also a key area of discussion in Westpac Economics’ latest Market Outlook in Conversation podcast.

In contrast to those facing the consumer, conditions remain highly supportive for Australian firms, NAB’s latest business survey reports. Up 3pts to +25 in September, the strength in conditions is broadly based across states and industries. And, with capacity utilisation still at historically strong levels, activity looks to have been resilient through Q3. Business confidence did however ease in September, down 5pts to +5, to be roughly in line with the long-run average. Constructive to the inflation outlook was the gradual easing in upstream cost pressures, although they remain at very elevated levels, having reached a peak in July.

The September overseas arrivals and departures release meanwhile continued to reflect a robust recovery, with each component having posted strong seasonally adjusted gains since the June/July travel season (+31k and +36k). The key highlight though was centred on net arrivals of travellers on ‘temporary work’ visas, an estimated +19k in September and +12k in August, marking significant progress in reducing visa processing backlogs. As grants continue to flow, the return of foreign labour should, in time, go some way towards alleviating Australia’s labour supply constraints.

Turning then to the US, where CPI inflation again surprised to the upside in September as headline prices rose 0.4% and the core measure (ex food and energy) gained 0.6%. Interestingly, while above market expectations and a multiple of the FOMC’s 2.0%yr medium-term target, the underlying detail of this report differed to recent reports with similar headline outcomes that sparked market alarm. Most notably, core goods prices were flat in the month, having averaged a 0.5% gain the past five months. Food inflation meanwhile looks to have peaked, admittedly at a very high level; and, albeit with less certainty, the same could be said of shelter. In our view, the overarching messages from this report is that support for inflation from demand looks to be fading quickly and, while stubborn, supply-side factors are topping out. For the FOMC, this should be a pleasing sign, although it is too early to slow the pace of tightening.

Westpac continues to expect another 75bp hike at the November FOMC meeting followed by 50bps in December and a final 25bp move at their January/ February meeting, leaving the fed funds rate at 4.625% at peak. Given the FOMC’s recent rhetoric, and the stubbornness of supply-side pressures, it is appropriate for the market to continue pricing modest upside risk to the peak level of fed funds and, more significantly, the length of time the fed funds rate will be held at peak. As discussed in Market Outlook in Conversation, the underlying trends evident in the inflation data along with the clear loss of momentum in domestic demand and job creation give us confidence that US interest rates will move lower from 2023, with term yields to front-run 200bps of cuts in the fed funds rate through 2024 and the first half of 2025 to a more neutral 2.625% at June 2025.

Finally to the IMF’s latest WEO. Unsurprisingly, the IMF’s global growth forecasts highlighted lost momentum and downside risks. At 3.2% and 2.7% for 2022 and 2023 respectively, the IMF are still more optimistic for the current year but pessimistic on 2023 than we are (Westpac 3.0% and 3.3% respectively). Regarding 2023, our more constructive view comes as a result of a stronger showing by developing economies, particularly in Asia as a result of their easier financial conditions; ability to stimulate; global tourism’s re-opening; the region’s ongoing economic development; and, for China, a progressive exit from domestic COVID-zero restrictions. These factors should allow the region to be materially stronger in 2023 than 2022, also supporting the currencies of the region against the US dollar, with flow-on benefit for Australia’s dollar. For interested readers, WEO provides considerable detail on the impact of inflation and tighter financial conditions on the global economy as well as assessments of past high-inflation periods and the lessons for today.

On Sunday, October 16, the 20th Congress of the Communist Party of China will take place. This rare event occurs every five years and plays a significant role in the world’s second largest economy. Let’s discuss why this event is worth following.

About the event

The 20th National Congress of the Communist Party of China (CCP) is convened on Sunday in Beijing. The event, which occurs every five years and usually lasts a few days, includes announcements and resolutions and eventually unveils a new Standing Committee, a small group of 25 core leaders in the Politburo. Traditionally, the top leadership is chosen at the party congress, including the General Secretary and Prime Minister.

The main questions that the party will discuss are:

• Economic issues and future policy.
• The analysis of top leaders’ results.
• The domestic policy prospects.

The decisions that the party will end up with can also influence other spheres.

What is expected?

The main thing that people are waiting for is the news about Xi Jinping’s leadership. It’s believed that he will be re-elected for a 3rd term in office. Under his leadership, many complex problems were solved that remained unresolved for a long time. For example, a the significant success was achieved in the fight against corruption, which was consolidated everywhere.

Then, the party should discuss several economic issues. Economic growth has been hampered by an intensifying trade and ideological battle with the United States that sometimes threatens to escalate into actual conflict. Also, due to the Russian-Ukrainian conflict, big Chinese businessmen and bankers are willing to occupy the niches in Russian businesses that have opened up after the departure of Western firms. However, they act cautiously, fearing falling under secondary US and EU sanctions.

Another essential problem to discuss is Covid-19. Many of the Chinese hope that China will move away from the "COVID zero" policy as it dramatically delays supply and production. Top management is aware of the economic costs but so far, it has been reluctant to change course. The Chinese government mentioned overall planning, which coordinates COVID-19 epidemic prevention and economic and social development but also insisted on normalizing China's measures to combat COVID pretty strictly. However, the past year has shown that these goals directly contradict each other, and continuing the current course of epidemic prevention will inevitably sacrifice economic stability and development.

What about the Chinese Yuan?

Possible changes in domestic policy can significantly affect the national currency. The yuan has also been under pressure from the rising dollar lately and has reached highs in the past six months. USDCNH broke through the psychologically impressive level of 7, marking a significant technical development for the currency pair.

Conclusion

This rare event may be a dark horse in today’s world situation, as changes in Chinese politics can influence CNH pairs and stocks. Follow it, and gain fundamental analysis skills.

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