Aussie Steady as Confidence Data Softens

Australian consumers have been hit hard by high inflation and steep interest rates, so it’s no surprise that consumers are deeply pessimistic about the economy. The Westpac Consumer Sentiment index declined by 2.6% in November, down from 82 to 79. The RBA’s recent rate hike certainly didn’t boost confidence, as consumers expect mortgage rates to continue rising over the next 12 months.

Pound Shrugs as Wage Growth Cools, US Inflation Next

The UK labour market remains strong, despite high inflation and elevated interest rates. The unemployment rate was unchanged at 4.2% in the three months to September, just below the market consensus of 4.3%. Wage growth excluding bonuses eased to 7.7% y/y in the three months to September, after a 7.9% gain in the previous two periods. This was the first decline since January and is an encouraging sign that inflation is moving lower.

US: Lower Prices at the Pump Cool Headline Inflation, and Cooler Core Inflation Provides Reassurance

Well that is more like it. October's CPI inflation report showed encouraging progress towards the Fed's 2% target. Core inflation is still well above a pace consistent with the Fed's target, so it remains way too early for the Fed to declare victory, but policymakers likely just exhaled a bit. On a three-month annualized basis core inflation was 3.4% in October – still too high but pointing to further deceleration ahead.

US October CPI: No Spooky Surprises

October's softer-than-expected CPI print is an encouraging development for the FOMC and reinforces our view that the FOMC has ended its hiking cycle. But, we do not see the latest data as a game-changer for inflation's path ahead. With inflation in October held down by volatile components like gasoline, travel services and autos, we expect inflation's return to 2% will continue to be a slow grind.

Sunset Market Commentary

It all boiled down to October US inflation figures today. Headline inflation was flat compared to September (vs +0.1% M/M forecast) resulting in a slightly bigger than anticipated drop from 3.7% Y/Y to 3.2% Y/Y. Energy prices were down 2.5% M/M with gasoline dropping 5% compared with September.

Was Inflation Transitory After All?

Yesterday's, US October CPI surprised to the downside both in headline (+0.04% m/m SA; consensus +0.1%, Sep +0.40%) and core (+0.23% m/m SA; consensus +0.3%; Sep +0.32%) terms. Shelter accounted for the majority of the downtick in core inflation, but promisingly for the Fed, price pressures in the broader services sector also appeared to moderate.

Inflation Fever Breaks

Good news came from Britain this morning, as well. Inflation in the UK fell 6.7% to 4.6% in October, lower than the 4.7% penciled in by analysts. Core inflation also eased more than expected to 5.7%. There is growing evidence that the major central banks’ efforts are bearing fruit. Cable is sold after the CPI data, but the pullback will likely remain short-lived if the USD appetite continues to wane globally.

Fed Done Hiking and Readying a Full Percentage Rate Cut by End Next Year

The Fed is done hiking and readying a full percentage rate cut by end next year. That’s what markets concluded from yesterday’s <0.1% ppt lower than expected CPI numbers. It triggered a mindboggling repositioning across the curve. It’s as if markets were waiting for one/any number to scoop up battered Treasuries.

British Pound Rose Confidently as U.S. Inflation Slowed

During the early European trading session, GBPUSD declined following the release of lower-than-anticipated U.K. CPI numbers. Today's key event is the U.S. Producer Price Index (PPI) report due at 1:30 p.m. UTC. If the PPI figures exceed the forecast, GBPUSD could fall below 1.24500. Meanwhile, lower-than-expected PPI figures could support the short-term upward trend in GBPUSD.

Gold Rises as U.S. Dollar Weakens After Inflation Report

Gold (XAU) gained 0.87% on Tuesday as the U.S. dollar started to weaken after the U.S. inflation data demonstrated a slowdown, reinforcing beliefs that the U.S. interest rate might have already peaked.