It's All About Inflation

0:00US shares are up, European shares are down and the Aussie dollars down as well. Why? Well, it's all about inflation. The US seems to be managing to show resilience in the face of rising all prices with inflation softening, whereas Europe has the opposite story to tell. But why is the Aussie dollar down so much? We'll look at that as well today. It is Thursday morning. It's the 1st of October, 2026. It's the morning call from now. Good morning. All the US dollar has been up and down in this session, but it is pretty much where it was yesterday right now, whereas the Aussie dollar is down half a percent down to around 69 and a half US cents. Bon yields higher in the United States. So up six basis points for 10 year treasuries and up in France, but by a similar amount. But up just one basis point for 10 year guilt in the UK and down five basis points in Germany. Aussie 10 years were at 5.35% yesterday, up four basis points on that overnight on futures and shares higher in the US, but down in Europe. So the NASDAQ is up 0.9%. The S&P is up 0.3%. But a 0.8%

1:04fall in the Euro stocks 50 and similarly with the DAX and oil up 0.9% for Brent up to 1350 a barrel and WTI is up 1%. And Nabskeimasters joins me this morning. So it seems there's a real US Europe divide today. Sky US shares up along with rising bond yields. Europe we've got shares annualed down. So what's driving that difference? Morning Phil, it has very much been a data led session overnight quite a bit of data out through Europe and the US. And there has been a bit of a divide in terms of what's come out on inflation. If you look at the financial market price action, it has been a pretty subdued session. Really you have had US stocks as you've mentioned, take a little bit higher. That's very much been led by the NASDAQ. The DAO is pretty much slightly lower looking at it right now. And the S&P is only up slightly weaker equity markets. You've got oil price, which has been pretty steady,

2:07but steady at elevated levels and supporting that sentiment overnight in oil has been reports that oil flows through the straight and near pre-war levels. So that's positive, but offsetting that positive news was the latest inventory data on US stocks, which has seemed to be at their lowest level in 12 years. And so I guess that news is a bit unwelcome in the backdrop where we know President Trump is suggesting that the US should ban diesel exports. So we're still seeing that elevated oil price, which is putting pressure on markets. But what has taken my attention is that it has been the moves that you've seen in bond markets overnight. Part of that has been due to the data that's come out, but you've seen a clear underperformance of Treasuries overnight. So US 10 years trading up to an end-to-day higher 530, 30 years of touched 564. So some big moves in long-dated US Treasury yields as you said at the open sort of bonds and guilds are pretty much

3:09unchanged. Front of the Treasury curve is pretty much unchanged, but it's that pressure in the long end that continues. And if you look at over the month, we've just finished the month of September, if you look over the month, you've had US 30 years, they rose by 40 basis points on the month, US 10 years are up 55 basis points, and US 2 years are up 54. So pretty meaningful moves there. For now, you can probably say that repricing is somewhat orderly because it has coincided with the repricing of the Fed. We've seen the market. So shift expectations for the funds rate from 480 by middle of next year to, sorry, from 420 by middle of next year to up to 480, the pricing about 480 now, so in the front end, that said, I think it's worth highlighting the B.O.E. financial stability report, which was released overnight. And they did highlight the elevated hedge fund leveraging guilt and the risks that poses to guilt markets in times of stress. I think that's not

4:11just an issue for guilt. So I think it's an issue across bond markets. You've seen that shift in ownership and an increase in more speculative holding. And what that means is it is going to, it is causing increased volatility in interest rate markets. And you're seeing that in bond indicators, which are elevated at present. So the data from the United States, it was largely good news, wasn't it? So the ADP employment numbers for September stronger than expected, core PCE, obviously, that they're measure for inflation, which was a bit softer than expected, which is completely counter to what we saw in Europe where inflation is ticking up a little bit. And spending was higher. So it was almost for the United States. It was almost like the best of everything. Inflation's slowing, the economy doing okay. Was there any bad news in all of that? It was a good mix of data. And I think that's supportive of the NASDAQ pushing higher on the day and front end yields, not shifting higher. And actually the markets, the Fed for October, the markets now only pricing around a 37% chance of a 25 base point hike in October. So that market

5:16has pushed out that pricing. So some, as you say, some positive numbers there ADP came in at 90,000 the market was expecting a 75,000 prints. So strong there. US GDP, this was the third read for Q2, that was revised up from 1.5 to 2.2. So I'm meaningful, upward revision there. And as you said, the core PCE came in better than expected. So market was expecting a 0.3% rise for the month of August and it came in at 0.2. And the annual rate now is it, is it 3%. So you're correct. Some positive numbers there, which is in contrast to what we saw in Europe. But if we unpack that PCE number, which I think is obviously important for expectations, what the Fed is going to do, as I said, it came in slightly better than expected. But the real focus there was the revisions to the data. So there were more than had been expected. So this was the, as I said, revisions to the PCE data. And it took

6:18around 36 basis points off the annual rate. So that's coming at 3%. I think the market was expecting down revisions of around 25 basis points. So taking the annual rate to 3% sorry, which is better than we had seen. And on annualised rate, the three month annualised rate for core PCE is now at 2%. And that's down from 2.6%. So down will be revision there. And that will be looked on favorably by the Federal Reserve. Whereas it is very different in Europe, where inflation is rising more than expected. I guess this is simply, they rely on imported energy. As we started this discussion, it really does explain this difference between the United States and Europe, doesn't it? Yes, it does. So we get the Eurozone CPI print out on Friday. But overnight we got prints for France and Germany in Spain. Germany came, the breed came in at 0.6%. The market was expecting a 0.5%. So the annual rate isn't running at 3.3. And the CPI numbers out of France

7:24came in slightly stronger than expected as well. So the expectation for Europe now is that print that comes out on Friday is going to be stronger than expected. I think the market consensus for the annual rate is at 3.7%. The pantheon is noting that it could come in at around 3.9. So quite a bit higher than expected. And so obviously the markets fed that through into their expectations for the ECB. Now October is still isn't fully priced for rate hike, but the market has lifted expectations for October. And through the tightening cycle, the market is now priced in 57 basis points of tightening by the ECB. So that divergence there in terms of inflation, which we can also dig into what inflation numbers for Australia were in a minute. But if you just go back and finish up on the US, I think it is worth, as I said, noting the stronger GDP print that came out. We also got numbers on consumer spending, which is now running at

8:28its fastest pace in over a year. So the data is all supportive of that view that the US economy is tracking pretty well despite the higher energy costs. And so that I think that has fed through into what you saw in the market pricing. A reason why you saw pressure on longer dated yields as opposed to the front end. So the longer in the long end, the market's pricing that view that the US economy is tracking okay. Maybe that means that your mutual rates are going to be higher in the US than previously expected. Currency wise, I said that the despite all of this, the US dollar is pretty much where it was this time yesterday. No clear direction. But there was a clear direction in the Aussie dollar and that direction was down. It was the hardest hit of the major currencies. You mentioned Australian inflation. Has that got a bit to do with that? Yes, it does. I think the data that has come out this week combined with the RBA has put that downward pressure on the Aussie dollar. So it's looking at it now. It's at 69.48. Big moves we've seen over the last month in terms of

9:30downward pressure on the Aussie dollar. Back on the 8th of September, it was 72 cents. So it's a quite a meaningful move that you've seen in the currency. And looking at the inflation numbers in Australia, they did come in slightly lower than expected. So you had your trim to mean measure on the month came in at 0.2% for August. The market had been expecting a rise of around 0.3. And your rate unchanged. So still at 3.6. On the headline print came in at 0.4. Market had expected a rise of 0.5. And your rate ticking up to from 3.5 to 4% in the market had been looking for an unirater 4.1. So modestly better than expected on the inflation side in Australia. And that downward surprise was broadly based. So it came across groceries, new dwellings, motor vehicles and childcare. No surprise though that there was an increase in petrol prices on the month. So they were up about 14.8%. But overall that report supports a view that the

10:34strength in the previous month in July was most likely reflected residual seasonality as opposed to a further acceleration in inflation. So there had been that those fears that inflation may have been accelerating. So the August print maybe suggests that wasn't the case. Having said all of that inflation is still running stronger than the RBA's forecast made back in August. And with the August numbers now released our economics team are finalising their Q3 inflation forecast. Their forecast currently sits at around 1%, which is above the RBA's forecast. But they are saying the risks are currently tilted to a slightly softer print of around 0.9%. So on the back of that inflation print you did see the market shift their pricing for the RBA. So now eased off expectations that the RBA might do back to back rate hike. So hike again in November. And as I just said before when we were talking about the currency. There has been a series of data this week

11:35that has supported that view that maybe the RBA can be a little bit more cautious and that weight and sea. Remember we did have the week and then expected retail sales report. We did have the RBA which wasn't seen as hawkish as expected this week. And then yesterday we've obviously had that downside surprise to inflation. So let's look at China then very quickly because we've got their official and unofficial PMIs on the same day yesterday and they both had a similar story to tell in that the service sector is into growth territory in both reads and manufacturing growth is perhaps slowed a little. But that service sector is interesting isn't it? Maybe the government is starting to have some influence. Yes, look at the view coming out of the China data yesterday was it maybe that fiscal stimulus is starting to gain traction. So in the data you had the official PMI reports and the rating dog print and both reflected sort of rising activity. And the view is that this was this this increase may be in support of by fewer weather related disruptions.

12:36But also as you said maybe where finally starting to see that fiscal stimulus sort of feed through and gain traction. Should note that this data obviously precedes the additional policy support that's been announced earlier this week out of China which was aimed at supporting the property sector and infrastructure investment. The expectation is maybe we're going to see further gains in manufacturing and service activity going forward in China. Today a US manufacturing ISM I think is expected to show continued growth as well as we've been talking and the RBA financial stability review and the TANCAN large manufacturing index for Japan we get building permits as well for the US and the unemployment rate for Europe and those inflation numbers as well. I'm I'm missing anything anything they particularly want to talk about. No, I don't think you've missed anything Phil in that list of what's coming out. I think on their financial stability review report with house prices declining. Attention's obviously going to be focused on their updates on their analysis on the share of borrow borrowers with negative activity. I think back in March it was just

13:42below 1% and probably also looking at any updated outlook for the share of mortgage holders in in cash flow shortfall. Right well do you remember that when we started the morning call we spent rather too much of the first year talking about Brexit and Britain leaving the EU and now Andy Bern on the Prime Minister has got all over the press today in the UK it's all about whether Britain is going to go back into the EU. I wonder what we're going to start our next 10 years talking about Britain getting back in there that seems to be the the flavour of the mood actually in the UK then I mean so it's going to be interesting to follow that over the next 12 months. Anyway we'll leave it there for now. Good Stalk Sky. We'll see you next time. Thanks Phil. And yes if you haven't called on it is the first of October. We are back again tomorrow morning. I'll see you then. I'm Phil Dobby for that. Thanks for listening.