Financial markets enjoyed a solid rebound over the week post the release of the US CPI data which was lower than expected. This resulted in a big uplift in both equity and bond markets on the back that the Fed may be done in regard to its rate tightening cycle. The week also saw the wrap up of the APEC Conference where President Biden and Ji both met. While there were few concrete outcomes, the importance of reestablishing a constructive dialogue between the US and China cannot be underestimated given the current macro and geopolitical backdrop. Given the CPI print along with other moderating economic data out of the US and softer corporate earnings outlook from the most recent 3Q reporting season, we do believe that the Fed is now on an elongated pause, and potentially is done with tightening should inflation continue to moderate lower. With this backdrop the more cyclical parts of the market (i.e. global SMID, IG corporate debt) along with other interest rate sensitive sectors (REITs and Infrastructure) rallied. The uplift in both equity and bond markets underpins our view that once we see peak rates and a period of central bank stability, this has the potential to see a more synchronised improvement across financial markets. However, despite the bullishness across markets, we believe there will be no rate cuts through the 1h24 and the potential for the RBA to increase rates locally is still in play through the 1q24. The rally in US yields saw the A$ move higher. We believe a more sustained recovery in commodity markets as well as an improving outlook for China will be required before the A$ can break out of its current 0.64-0.65 range (to the US$). With US Thanksgiving (23rd) this week, market activity is expected to be a little quiet, although minutes from the Fed’s Nov meeting along with US PMI will provide further information on the strength of the economy. We expect that the PMI will be marginally expansionary (Composite f’cst 50.4 pts) although weaker (-0.3 pts) from the prior period. Locally, the RBA minutes for Nov (21st) will also provide further details on the inflationary outlook and set the tone for domestic bond markets.
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