Weekly house view | Fed done despite inflation running hot

Stronger-than-expected inflation last week showed US core price pressures remain resilient, and we expect Federal Reserve policymakers to keep a hawkish bias even if they do not raise rates again this year. Super core inflation, the Fed’s preferred price indicator, rose 0.6% month-on-month in September. The US labour market also remains resilient, with 209,000 initial jobless claims in the week ending 7 October, the same level as the prior week. This suggests Americans’ job security is high. US retail sales data for September on Tuesday will give fresh insight into the health of the consumer. Despite sticky inflation, US market rates came down last week (-3bps for 10Y) on the back of a flight to safety resulting from the conflict in Gaza, and Fed officials saying the market is doing some of the central bank’s job, resulting in a de facto tightening of financial conditions. We expect the Fed to keep rates unchanged at its November meeting. 

Surging oil and gold prices serve as a reminder of the impact geopolitical tensions can have on markets. The robust economic data from the US and the Israel-Hamas conflict is leading to a flight to safety and liquidity. The result is a strong dollar and a jump in the price of gold, which rose by 5.4% on the week. We like gold as a protection against rising geopolitical tensions. On oil, we maintain our year-end target of USD95 a barrel for Brent. Equities have shown remarkably little volatility in the face of the Israel-Hamas conflict so far, with more weight given to comments from Fed officials. This week, markets will pay close attention to more earnings reports. Third-quarter US earnings are expected to be flat. Large US banks reported better-than-expected results last week, though executives warned of an uncertain environment with an uptick in charge-offs. Moreover, large US banks reported USD700 billion in unrealized losses on hold-to-maturity bond portfolios. 

In China, the Golden Week holiday pointed to some improvements, with the number of Chinese tourists and average tourist spending recovering to 104% and 98% of 2019 levels respectively. To support the economy, Chinese policymakers are considering the issuance of at least RMB 1 trillion ($137 billion) of additional sovereign debt for spending on infrastructure, similar to the scale of 2020. China’s sovereign wealth fund bought shares in large banks in the country for the first time since 2015, raising expectations Beijing will intervene to support the market. On the political front, there were signs of easing US-Sino tensions. However, the market did not take the positive news so well as a large Chinese real estate developer said it will not be able to make all its offshore repayments, showing the country’s real estate problems are not yet solved.