The past week delivered a notable shift in market psychology, with investors increasingly grappling with the prospect that the next move for several central banks may be up rather than down, except for in the all important U.S. market. Australian assets bore the brunt of this repricing, though the theme resonated globally.

Australia: From Cuts to Hikes in a Matter of Weeks

What a difference a few months makes. Not long ago, debate centred on whether the RBA would cut in February or wait until May. Now markets are pricing an outside chance of a rate increase at that same February meeting.

The RBA's Tuesday decision to hold rates at 3.6% was universally expected. The hawkish communication was not. Governor Bullock revealed the board spent considerable time discussing circumstances that might necessitate rate increases, while a rate cut wasn't even on the agenda. Markets responded accordingly, pushing three-year yields above 4% and ten-year yields to 4.75%.

Supporting the RBA's cautious stance, the NAB Business Survey showed capacity utilisation hitting an 18-month high. With six of eight industries operating above long-run averages, the inflation risks from demand pressing against supply constraints are evident. Business confidence did tumble from 6 to 1, likely reflecting disappointment at the evaporating prospect of rate relief, but conditions remained solid at 7.

Third-quarter GDP of 0.4% undershot expectations, though the miss was largely attributable to inventory drawdowns rather than fundamental weakness. Private consumption rose 0.5% and business investment jumped 3.4%, reinforcing concerns the economy may be testing its speed limits.

United States: One More Cut, Then What?

American equities have been quite volatile down slightly for the week as the market digests uncertainty around capex and return on investment in the technology sector. Concerns about AI profitability in particular continued weighing on sentiment, with Microsoft slipping on reports of reduced sales targets for AI-related products.

The labour market sent conflicting signals. ADP private payrolls disappointed, marking the third decline in four months, yet weekly jobless claims dropped to 191,000. The JOLTS survey added another layer of complexity: job openings beat expectations at 7.67 million, but the quit rate fell to 1.8%, its lowest outside the pandemic since 2014. Workers appear reluctant to leave positions they have, even as vacancies remain elevated.

A December Fed cut remains firmly priced at 85% probability, but the path beyond is less certain. Markets now expect roughly 77 basis points of easing through 2026, with considerable attention on this week's updated projections.

Broader Themes

Japanese yields continued climbing, with ten-years reaching 1.94%, their highest since 2007. Markets assign an 87% probability to BOJ tightening this month, even as the government contemplates fiscal stimulus.

Chinese trade data highlighted the ongoing redirection of exports away from America. Despite U.S.-bound shipments declining, total exports rose 5.9% year-on-year as manufacturers found alternative destinations. The Politburo pledged moderately loose monetary policy and proactive fiscal measures, though specifics remain scarce.

Oil weakened through the week, with Brent falling below US$62 per barrel, while gold extended its record run above US$61 per ounce.

Week Ahead

The Federal Reserve decision commands immediate attention while Australian employment figures later in the week could prove pivotal for February rate expectations, with the local rate market now finely balanced between holding and hiking.