MNI RBA WATCH: Bullock Points To Dual Mandate Following Hike

Reserve Bank of Australia Governor Michele Bullock stressed the importance of the Bank’s dual mandate following the Board’s six-three split decision to raise the cash rate by 25 basis points to 4.85%, noting the labour market remained an important consideration while risks to the central economic outlook were now more balanced.

The Bank's underlying cash rate assumption had shown one more hike prior to this decision, she said. (See MNI RBA WATCH: Board Likely To Hike Following Hawkish Signals) "Now, it may be that that doesn't work out to be enough, but I think there was a feeling that if you look at the forecasts, it wasn't as obvious as it was in some of the previous meetings where we had three big, skewed upwards risks on inflation,” she explained, adding risks to economic activity were now broadly balanced.

The revised assessment did not rule out further increases in interest rates, but the Board was preserving its options rather than signalling a particular course of action, she said.

SPLIT DECISION

The Board’s split decision and revisions to its accompanying statement, which removed a previous reference to the Board being "willing to increase the cash rate further if necessary," prompted markets to scale back expectations of further tightening.  

The Australian dollar weakened about 0.4% against the U.S. dollar despite the hike, while overnight indexed swap markets priced in little chance of a December increase and only a 25% probability of a February hike, down from about 35% before the meeting.

“The board's dual mandate is still in play here. We are not looking to tip the economy into recession if we can avoid it,” Bullock said, reiterating the Board's desire to preserve employment gains while bringing inflation back under control. 

“But we do need to get inflation down, and we do have excess demand at the moment. Our central forecasts do not see us going into recession, but it does see growth slowing quite markedly.”

In its updated Statement on Monetary Policy, the Bank forecast unemployment would rise to 5.1% by December 2028, 30bp higher than its August projection, alongside a higher NAIRU estimate. (See chart) It also increased its trimmed-mean inflation forecast to 2.9% by December 2027, 30bp above its August forecast.

Bullock said slower income growth, weak productivity and the supply shock had left households poorer, making subdued consumption feel like a recession even if the economy continued to grow. "And this is a manifestation of a lack of productivity growth, and the fact that we've had this massive supply shock imposed upon us.”

The hike was the Bank’s fifth this year and took the cash rate to its highest level since November 2008.

SUPPLY SHOCK

Bullock said the effects of higher oil prices and tighter capacity would keep inflation elevated over the coming year, adding that the Bank needed to ensure monetary policy was sufficiently restrictive to bring inflation down once those pressures eased.

Higher inflation over 2027 was "baked in", she explained, pointing to domestic pressure and oil prices. "It starts to come down after that, but really to the point about what we can do? We can't do much about the next year, so that's why it's really important that we make sure that we're in a position that when those baked-through inflation pulses have happened, that we've got enough restriction in the economy that it will put downward pressure on inflation from there.”

Bullock said the Bank wanted to prevent higher inflation becoming entrenched in expectations, with businesses passing on higher costs and households increasingly accepting inflation of 3-3.5% as normal, echoing Deputy Governor Andrew Hauser's earlier comments regarding the Bank's "nightmare scenario."

MNI INTERVIEW: Manufacturing Solid But War Sours Sentiment-ISM

U.S. manufacturing activity picked up in October but growth is being held back by policy uncertainty and continued Middle East tensions that is also souring sentiment, Institute for Supply Management manufacturing chair Susan Spence told MNI Monday. 

Spence said she remains convinced the Iran war is preventing a more significant expansion in factory output. The "floodgates would open" if the Middle East issues were resolved, she said. 

The ISM manufacturing index rose 1ppt in October to 55.5, above market expectations and marking the tenth consecutive expansionary reading. The details suggest there is momentum behind the upswing with all five subcomponents in expansion territory. October's rise was primarily driven by the production subcomponent, which registered its highest reading since November 2021. 

"The general sentiment is is a lot worse," Spence said. "What if the war was really over? Can you imagine? You could have a blow-the-doors-off economy. The underlying strength is still there, despite that, which just makes me think it could be so, so much better."

Industries are benefiting from the AI buildout and higher defense spending, with the report showing an uptick in production across machinery, computer and electronics, and equipment manufacturers.

The decline in the employment index also caught eye of the ISM manufacturing chair. However, hiring sentiment improved in October with 1.8 positive comments for each negative comment, a little better than last month's survey, she said. 

The mix of the ISM report's comments was 34% positive and 66% negative, down from a 40-60 ratio in September. Pricing volatility was the top concern of the negative comments. 

PRICE PRESSURES

Spence said the month's report is infused with concerns about the outlook for prices. "That impacts sentiment even if the report is good," she said.

The data point to continued price pressures for manufacturers, though the prices index eased 2.7ppts to 75.2. There were 20 commodities reported up in price versus two reported down in price, and 8 commodities reported in short supply, highlighted by metals and tech-related items.

Responses to the survey continue to suggest price increases in steel and aluminum, tariffs, and increases in petroleum-based products are the main factors behind higher input costs. Combined with still-elevated supplier delivery times, cost pressures for manufactures will be sticky, she said. 

'"We've got years of pricing increases. It's scary to be now closer to 80 than 50" on the prices index, Spence said, adding that she is not relieved by October's drop in the price index. (See: MNI INTERVIEW: Fed To Hike Twice More, Hold A While-Weinberg) 

ENERGY JITTERS

Higher oil prices are keeping input costs under pressure. Combined with slowing supplier deliveries, manufacturers will continue to face price pressures in the near term, Spence said. She added that orders feel like they are being held to a minimum, perhaps due to uncertainty.

"I just I feel like if prices don't settle down it's eventually going to manifest in ways that won't be pretty," she said. "But but we are in an expansion. That's not nothing."

The Trump administration has recently sent signals it could ramp up the conflict in the Middle East after the midterms elections. Spence said she will be keeping an eye on the ISM semiannual forecast that will come out in December to see how manufacturers see pricing developments. 

If the Iran conflict escalates, Spence expects firms will pass along price increases. "They're gonna pass stuff along, right?" she said, noting that the last forecast in May saw firms largely dismiss the war's impacts on prices. This time, "I think we're going to see something very different."

MNI INTERVIEW: Fed To Hike Twice More, Hold A While-Weinberg

The Federal Reserve will likely raise interest rates twice more in coming months and then keep them there for some time to ensure that inflation resumes its descent toward the central bank’s 2% goal, former Richmond Fed research director John Weinberg told MNI. 

"I would say probably a couple more might do it,” he said in an interview. “I think you want rates to be clearly restrictive, and I'm not sure we're there yet.”

Weinberg said it was acceptable for the Fed to hold rates steady last week, particularly given the looming midterm elections, but that it does create some risks given an inflation rate that has been above target for five and a half years. 

“If in the past the committee wanted to sit on its hands right before an election, that doesn't matter so much. But that relies on there being pretty solid locked-in public beliefs about what the medium-term path looks like,” he said. “If there's reasons for wondering about that, then that adds a little bit of risk. I think you could say that that's kind of the situation we're in now.” (See MNI INTERVIEW: Lockhart Sees Next Fed Hikes In Dec, Q1)

WOBBLY ANCHOR

He worries inflation expectations are not as firmly anchored as Fed officials claim, given the sheer persistence of lingering price pressures. 

“I fear that the prolonged period of elevated inflation could itself be adding some persistence through near-term and medium-term expectation effects. That could be happening even if we don’t see major movements in measures of long-term expectations,” said Weinberg.

“That would be telling us that the market expects the Fed eventually to do enough so that over the long-term inflation is going to come back to 2%, but if you don’t do it then you might lose that confidence.”

He said second-round effects from higher energy costs are possible even if oil prices don’t move higher from current levels around USD100 a barrel. The right level of policy restrictiveness becomes even harder to gauge because the neutral rate of interest could be climbing in real time, said Weinberg. 

“It’s made all the trickier by what’s going on with the term structure and term premia. If those are pointing to a general increase in uncertainty all the way across the curve, then certainly that doesn’t make R-star lower, if anything it makes it higher.”

“That’s one of the pitfalls of this language that people slip into sometimes by saying that markets are doing the Fed’s work for it because long rates are going up,” he added. “That’s about long rates and policy is about the short end. If there are things in the environment pushing up rates and you’re seeing that in the long end but the central bank is leaning against that in the short end, that’s working at cross purposes I think.”

HIGHER FOR LONGER

Weinberg said how long rates will need to stay elevated before the Fed can consider a reversal will depend on the path of growth, and on AI investment in particular. But if the current pace of expansion continues, there will be little room for easing on the horizon, he said. 

“If the economy sort of continues on the path that it's been on more or less, I don't think you'd want to be in a rush to take away the rate hikes that you put in. If you put it in to bring down inflation, you want to see inflation come down,” he said. 

Still, there is a scenario where the Fed might need to come to the rescue of a popping AI bubble. 

“Suppose this moderation in tech stock frenzy continues or deepens a little bit, and that feeds through to a slowdown in capital investment, capital expenditures in that sector. Then that could cause the economy to slow, perhaps to the extent of having a mild recession. If that happens, then the Fed is likely to want to respond to that if, if you've got real softening, if you've got real evidence of real softening. But if inflation hasn't really started moving down yet, then you might be you might be stuck with higher inflation."

MNI INTERVIEW: BOC Can Hold From Here As CPI Fades- Antunes

The Bank of Canada's rate increase last Wednesday is enough of a signal to affirm its inflation-fighting credentials, and the rate of increases in CPI should subside next year in any case as crude oil prices weaken, former central bank forecaster Pedro Antunes told MNI.

“What we're targeting here is the belief, right? They're trying to make sure that households and businesses believe that the central bank is on it,” said Antunes, now chief economist at Signal49, formerly the Conference Board of Canada. 

The memory of the jump in inflation to 8% as the Covid pandemic eased is fresh in officials’ minds, and they are also alert to the potential now for higher prices to feed second-round increases like wage inflation, Antunes said. Taming inflation is more difficult this time because it results from a global increase in oil and gas prices over which monetary policy has no control, he said, but the need to keep price expectations of domestic firms and workers in line remains the same.

"The Bank doesn't want to be behind the eight ball like maybe they were in 2022. They want to send a kind of stronger statement here, especially in light of these higher gasoline and oil price pressures," Antunes said. 

NOT DOING VERY WELL

"This is a tough situation for a central bank, right? It's supply. It's not because the economy is hot that they need to raise interest rates. The economy is really not doing very well at all," he said.

Canada's economic growth will slow from 3.3% annualized in the second quarter to 0.8% in the fourth quarter as another round of U.S. tariffs sink in, according to the Bank forecast Wednesday as Governor Tiff Macklem boosted the overnight rate for the first time in three years. The Governor expressed concern that with no end to the Middle East conflict in sight more firms will pass on higher energy costs. 

The Bank also boosted its 2027 inflation forecast by a percentage point to 3.1% and said CPI will remain above its 2% target until mid-2028. Macklem said he would be cautious when considering any further hikes, in an economy set to grow at a modest 2% pace over the next two years. 

"The Bank wants to kind of talk firmly, talk strongly to say that they will reach target," Antunes said. "Whether we actually need more rate hikes, I don't think we do." (See: MNI INTERVIEW: Macklem-BOC Faces Tough Calls Ahead On Rates) Economists and investors are split over whether the Bank hikes again over its next few meetings. 

EXCLUDING CORE INFLATION 

Flat job creation this year is another reason to pause, Antunes said, noting that unemployment has been kept from rising partly by a slowing labor supply as the government curbs immigration and Baby Boomers retire. 

Crude oil prices should fade next year rather than continue increasing in a way that keeps inflation elevated, Antunes said, though he cautioned that this view, as do views on the outlook for the trade war with the U.S., depend on assumptions about geopolitics. 

"It wouldn't necessarily lower prices, but it would at least lower inflation from that 3% range down," Antunes said. The Bank on Wednesday saw inflation above 3%, the top of its 1% to 3% target band, through much of next year. 

The Bank also stopped publishing forecasts for two inhouse measures of core inflation, which had stuck near 2% for much of this year. The reason for the change is unclear but Antunes noted an earlier move away from a third core measure that appeared to be giving poor signals. 

"Even economists have trouble understanding, because we're not quite sure what is in all of those measures that the Bank targets," he said.

Chicago Business Barometer™ - Dipped to 55.3 in October

The Chicago Business Barometer™, produced with MNI, dipped 3.5 points to 55.3 in October. The Barometer remained in expansion, above the neutral 50 mark, for a second month.

The decline was driven by decreases in Supplier Deliveries, Production, Order Backlogs and New Orders, partially offset by an increase in Employment.

SUPPLIER DELIVERIES SHORTEN TO LOWEST SINCE FEBRUARY

Supplier Deliveries fell 10.3 points to their lowest level since February, but remained in expansionary territory for the twenty-first consecutive month. The index mostly reversed the previous month’s increase.  Respondents reported mixed conditions: some noted that deliveries remained slow despite the shortening in delivery times, while others cited persistent delays out of Asia.

Production declined 5.2 points, remaining in expansion for a second consecutive month.

Order Backlogs decreased 4.4 points, remaining in contractionary territory for the fourth consecutive month, but still above August’s low.

New Orders edged down 0.6 points, remaining firmly in expansionary territory for a second consecutive month.

EMPLOYMENT AT HIGHEST SINCE APRIL 2021

Employment rose 10.3 points to its highest level since April 2021, returning to expansionary territory after one month in contraction. The increase reflected a higher proportion of respondents reporting increased employment and a lower proportion reporting decreased employment.

PRICES PAID ACCELERATE TO HIGHEST SINCE DEC 2021

Prices Paid accelerated 8.9 points, reaching their highest level since December 2021. Respondents cited cost pressures from chemical- and petroleum-based inputs, as well as fuel surcharges and freight costs. For the eighth consecutive month, no respondents reported lower prices paid than the previous month.

Inventories edged up 4.0 points, but remained in contractionary territory for the third consecutive month.

The survey ran from October 1 to October 13.

INTERVIEW: Short-End Skew Reflects Investor Demand- UK DMO

The UK's borrowing skew towards greater short-dated issuance is partly due to a continued shift in investor demand towards the front of the curve, the head of the Debt Management Office told MNI on Thursday.

The  demand shift in demand towards the short end has been a clear trend, "not least clearly given the persistent ongoing volatility in the global bond markets, which has been particularly affecting demand for long maturity bonds globally,” Jessica Pulay said in an interview.

But other factors are also at work, including the DMO's assessment "that shorter dated maturities remain relatively more cost effective than longer maturities,” Pulay said.

An additional driver of the increased short-dated issuance has been the DMO's programmatic gilt tenders, which have been more focused on shorter dated issuance.

The strength of the p-tender programme. along with strong market use of the Post-Auction Option Facility and solid demand on syndication deals, has helped the DMO cut the number of scheduled auctions this fiscal year, whilst still meeting its overall remit.

"We have actually been in a position to cancel six auctions since April 2026," Pulay said.

"The final reason why we were able to cancel auctions was because we have skewed to shorter dated supply, our auction sizes are relatively larger at those maturities compared to the longer dated maturities.”  (See MNI INTERVIEW: UK Wage Growth To Slow - OBR's Miles)

BILL SALES

Pulay also pointed to the increased T-bill issuance this fiscal year, noting the DMO was on an "evolutionary journey" at the front of the curve.

"T-bills overall are making a contribution of £8 billion to debt financing; this is a GBP3 billion increase to the GBP5 billion that was already announced in April.  We issue T-bills also for cash management purposes and our total current T-bill stock is GBP97.1 billion," she said.

The DMO is planning "a significantly greater, on an absolute and proportional basis, increase in short-dated gilt issuance" including T-bill sales, she said, pointed also to the newly-announced maturity point in the T-bill curve.

"We're going to be adding a new maturity point, a 12-month T-bill maturity. We have been issuing one, three and six months so far, so that new maturity is important; we will start issuance in January 2027," she said.

The new one year T-bill, along with the newly-announced standing repo facility -- also to start in January -- and maintained collateral pool would help underpin liquidity at that end of the curve, she said.

MNI: NGEU Debt Rollover Seen As Way Around Budget Talks Rift

A rollover of NGEU debt in the EU's next long-term budget (2028-34) looks like being the path of least resistance as European leaders struggle to agree on how to fund it amid deteriorating market conditions, EU sources told MNI. 

The group of countries backing a rollover now include France, Italy, Poland, Greece and possibly Spain too, one EU source said. Although the frugal group, including Germany and The Netherlands, remain opposed, the source suggested that an NGEU rollover might prove easier to concede than more major concessions on cohesion spending. 

A recent EU summit discussion on the budget ended in deadlock as frugal countries continued to clash with Eastern and Southern European states pushing to maintain high levels of cohesion and farm spending. 

Under the terms of the NGEU legal framework, repayment of the debt is due to start in 2028 and conclude in 2058. While the repayment schedule is required to maintain a "steady and predictable" pace over that period, strong political pressure from leaders of higher-deficit countries which are wrestling with a surge in financing costs could force an easing in that pace.

ROLLOVER SIZE UNCLEAR

While it is not yet clear how sizeable any rollover of NGEU debt would be, one 'big country' source suggested that leaders would probably be inclined to take "as much as possible" in terms of easier repayment terms.  

Bruegel's Zsolt Darvas, a senior fellow at the Brussels-based think tank Bruegel, estimates that a full rollover for the 2028-34 period of the next Multi-Annual Financial Framework (MFF) could save about EUR90bn for that budget period. In a 2024 Bruegel assessment, Darvas estimated that EUR168bn would need to be spent on debt repayments and servicing through 2028-34, EUR97bn on repayments and EUR71bn on interest rates. 

"Interest rates have gone up since 2024 and a full rollover would imply a larger debt stock to pay interest on. So, instead of EUR71bn the budget might pay about EUR75bn to 80bn. Still, it means in my assessment that EUR90bn could be saved in that period with a full rollover of EU debt," Darvas told MNI.

European Council President Antonio Costa has called a special EU budget summit on Nov. 26-27 to try and clinch a deal before the end of the year. Before then, Brussels is scheduled to publish its next report on EU contingent liabilities. Following the rise in bond yields across the EU, it is likely that the report will reveal a significant deterioration in the funding outlook for EU bonds.