RBNZ’s hawkish hold – UK Budget, BoC and Fed loom

Preview: The RBNZ holds despite hike bets, Asian chips surge, and a UK Budget, BoC and Fed trio lands today.

Overnight, September Australian CPI inflation data and the RBNZ rate decision landed overnight at 12:30 am and 1:00 am GMT, respectively.

For the former, the headline Q3 26 print came in better than anticipated (1.3% versus 1.2%), as did the YY RBA trimmed mean for Q3 (3.7% versus 3.6%). AUD/NZD initially moved higher, but quickly faded on the in-line measures. Overall, the market reaction was very poor.

For the latter, the RBNZ surprised the markets and kept the OCR at 2.75% – bear in mind that markets were FULLY pricing in a rate hike! This immediately sent AUD/NZD higher, with the press conference doing little to undo the damage. The decision was a split 4-3 vote, with the majority, including Governor Breman, pointing to softer headline inflation, smaller fuel pass-through and subdued wages. Yet Breman used the press conference to signal that further hikes are likely at upcoming meetings. That is a hawkish message from a central bank that has chosen not to hike.

Busy day ahead: UK Budget – BoC and Fed updates

UK Budget

The UK Autumn Budget will be delivered at around 12:30 pm GMT. This gives Chancellor John Healey and PM Andy Burnham the floor to outline their tax and spending plans. It goes without saying that Gilt yields will be in focus, and the pound’s reaction will depend on the driver of yield movements: a growth-driven rise (GBP positive) or a risk-driven rise (GBP negative).

BoC

An update from the BoC then hits the wires at 1:45 pm GMT, with investors assigning about an 80% chance of a  25 bp hike – which would bring the overnight rate to 2.50%. That is up from about 60% a month ago, though the direction of travel was not one-way, as pricing dropped below 30% after the September Canadian jobs report showed the economy lost nearly 70k jobs and the unemployment rate ticked up to 6.5%. 

Evidence for tightening rests on five-year consumer inflation expectations rising to 3.91% from 3.39% and BoC Governor Macklem’s warning that the bank should not respond too slowly if pressures persist.

Weak growth, with the Q4 forecast cut to 0.75%, and no evidence yet of oil prices spreading to other goods and services argue for caution.

Fed

The Fed rate decision is up at 6 pm GMT. My base case here is a hawkish hold decision, which is unlikely to do much to rattle the markets (OIS curve almost fully discounting a hold). CPI and PPI inflation came in hotter, so the Fed cannot lower its guard. At the same time, payrolls slowed to 29,000, unemployment ticked higher, and wages fell, which argues for patience. 

As I see it, the Fed has no reason to raise the target rate right now. I do not see the Fed walking back hawkish language at this juncture (USD negative), but I also do not see an outright hike tomorrow (USD positive).

Earnings

Big Tech takes over once the Fed is out of the way, with Microsoft and Alphabet both reporting after the US close. As I have said a number of times, the beat matters less than what the numbers say about AI spending.

Investors will focus on cloud growth at Azure and Google Cloud, capex guidance, and whether Alphabet’s search business is holding up.

Market snapshot

Chips drove a strong session overnight in Asia-Pac shares. South Korea’s KOSPI added about 6.5% after SK Hynix posted record Q3 operating profit, up nearly sevenfold. Japan’s Nikkei added 1.2% to roughly 64,000, while the Hang Seng was little changed.

Tech did the heavy lifting again in Tuesday's US session. The S&P 500 gained 0.6% to 7,722.60, and the Nasdaq rose 1.2%, led by a 3.6% jump in the semiconductor index on Anthropic’s IPO filing.

The 10-year US Treasury yield held near 4.99% and the USD was firmer yesterday. WTI slipped about 1.5% to around US$100 on US-Iran diplomacy (though it is on the front foot this morning at US$101.64), while gold rebounded about 1% to US$4,060.