RBA: Board “Cautious”, Inflation Persistence & Excess Demand Could Drive Hike
Rates were unchanged in December as the Board felt it needed more time to assess data to determine how persistent the pickup in inflation is. It was “too early” to know especially given the newness of the monthly CPI. It did note that the October reading increased the risks that Q4 could exceed its projections, as well as price measures in the Q3 national accounts. Importantly, the “circumstances” that would drive a hike were discussed. However, it noted a number of times that it was appropriate to be “cautious”.
- The December minutes said that if financial conditions were not “sufficiently restrictive” enough to bring demand and supply back into balance and that the rise in inflation proved to be more persistent and drives a pickup in expectations then a rate hike “might need to be considered” in 2026. It appears there is a high bar for a delay to the return of inflation to the band mid-point.
- There were three “judgements” that drove the last decision – 1. output gap size and implications for inflation persistence, 2. Labour and economic outlook, and 3. If financial conditions were still restrictive.
- The Board appeared split over whether conditions were “no longer restrictive” or “a little restrictive”. The former noted that banks were being more competitive, the housing market reacted strongly to easing, and the low capital market risk premia.
- The Board estimates that there is excess demand and therefore a positive output gap. It noted data signalling capacity constraints in the labour market and the economy as a whole. It said there were upside risks to its forecast of a “broadly stable” output gap.
- It also wants to wait to see the full impact of 2025’s 75bp of easing but also the rise in short- and long-term yields.
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RATINGS: Moody's Upgrades Italy To Baa2 From Baa3, Still A Notch Below Others
The Moody's upgrade to Italy's credit rating announced late Friday was the first from the agency since 2002 but shouldn't be considered a major surprise. Among the 3 major ratings agencies, Moody's had the lowest rating on Italy - by two notches (Fitch and S&P both BBB+).
- So this upgrade to Baa2 from Baa3 represents something of a closing of that gap rather than a major breakthrough for Italy.
- From the release:
- "The rating upgrade reflects a consistent track-record of political and policy stability which enhances the effectiveness of economic and fiscal reforms and investment implemented under the National Recovery and Resilience Plan (NRRP). It also points to prospects of further policy actions supporting growth and fiscal consolidation beyond the plan's deadline in August 2026. As a result, we expect that Italy's high government debt burden will gradually decline from 2027 onwards."
FED: Heading Into Its Final Weeks, QT Pace Remains At $20B/Month (2/2)
On the asset side of the Fed balance sheet, we saw a $25B drop in assets, of which just $2B could be attributed to QT in one of its final weeks (ends Dec 1).
- Instead it was a $6B drop in dealer repo operations vs a week earlier, and $17B in "other" areas that aren't related directly to monetary policy and typically don't have any significant impact on the size of the balance sheet (such changes are largely due to items such as bank premises, accrued interest, and other accounts receivable.)
- Discount window takeup edged up $0.3B to $6.1B but remains relatively low.
- QT has totaled just under $21B over the last month, around the expected pace, though as noted this will flatline in December with a pickup in net bills as MBS proceeds are rolled over into T-bills.
LOOK AHEAD: US Week Ahead: Retail Sales, PPI & Claims Headline Thanksgiving Week
A Thanksgiving-condensed week sees data highlights from delayed retail sales and PPI reports for September on Tuesday (Nov 25) before a Wednesday release for weekly jobless claims (Nov 26). Aside, the Fed’s Beige Book should also offer another important update on Wednesday for latest liaison reporting, with no Fedspeak currently scheduled around the holiday and the FOMC media blackout due to start on Saturday, Nov 29.
- As we regularly comment in this weekly publication, Redbook and Chicago Fed CARTS indicators point to solid nominal growth in retail sales, something broadly reflected in analyst consensus for the release.
- PPI inflation will offer a useful albeit not overly timely update on input cost pressures.
- Jobless claims will be watched particularly closely, both for latest initial claims for signs of layoffs and a notable update for continuing claims. The latter covers the payrolls reference period for November and will be an important reference point for FOMC members trying to get a sense of latest unemployment rate clues with the next payrolls reports coming after the Dec 9-10 FOMC decision (going into it with this week’s 0.12bp rise to 4.44% back in September).
