Rob Wilson, CFA, Director of Investment Strategy
Australia's latest inflation figures have increased pressure on the RBA to lift interest rates again next Tuesday. Meanwhile, the US Federal Reserve held rates steady, despite growing divisions among policymakers, and Big Tech earnings are putting the enormous investment in artificial intelligence under scrutiny. Here's the weekly wrap.
Key Takeaways
Australian inflation remains stubbornly high. Annual headline inflation rose to 4.3% in September, while underlying inflation increased to 3.6%, reinforcing concerns that progress towards the RBA's target has stalled.
A Melbourne Cup Day rate rise looks increasingly likely. Higher inflation plus Governor Bullock calling inflation ‘far too high’, has firmed expectations of a fifth rate rise next week to 4.85%.
The US Fed held rates steady. The Federal Reserve maintained rates at 3.75–4.00%, although two policymakers voted for an immediate increase. Markets expect another hike in December.
Big Tech's AI investments face scrutiny. Microsoft, Alphabet, Amazon and Apple report this week, a key test of the AI trade after Meta’s results rattled the market over the soaring cost of AI.
Australian Inflation Comes In Hot, Firming the Case for an RBA Hike
The week's most important Australian economic release was Wednesday's inflation report, which gave the RBA another reason to be concerned.
Annual headline inflation rose to 4.3% in September, up from 4.0% in August. Higher petrol prices were a major contributor, reflecting rising global oil prices, while housing costs continued to place pressure on household budgets.
Underlying Inflation Beats the RBA's Forecast
More importantly for monetary policy, underlying inflation rose 1.0% over the September quarter, above the RBA’s 0.8% forecast. Annual underlying inflation reached 3.6%, up from a revised 3.5%.
The figures reinforce concerns that inflation is proving more persistent than expected. While higher global energy prices are adding to the problem, domestic inflation pressures remain, particularly in housing and services.
A Melbourne Cup day rate hike now looks likely
Higher inflation has firmed the case for a fifth rate rise to 4.85% when the Board meets on Melbourne Cup Day, 3 November, with the market pricing in a hike around 85% chance. The main counterweight remains the soft labour market, with unemployment at a five-year high, but after this inflation reading print, a hold looks the less likely outcome.
For investors, higher interest rates can mean better returns on cash, but also higher borrowing costs and pressure on interest-rate-sensitive assets, including property
In the US, the Federal Reserve left interest rates unchanged this week, as markets had expected, keeping its benchmark in the 3.75–4.0% range. It was not a unanimous call, though: two of the twelve voting members dissented, both wanting an immediate rate rise.
The Fed described inflation as still elevated and upgraded its view of the economy, framing the pause as a chance to assess the impact of September’s hike. Chair Kevin Warsh declined to spell out what comes next, but markets have drawn their own conclusion: a rate rise at the December meeting is now seen as highly likely. A first read on US economic growth and the Fed’s preferred inflation gauge are also due this week.
Big Tech Faces an AI-Spending Test
The other major theme this week is corporate earnings, with the biggest technology companies reporting. Microsoft and Alphabet both delivered strong revenue growth, but Alphabet's shares fell sharply in after-hours trading after its results disappointed investors. Despite revenue growth of 25%, the reaction highlights just how high market expectations have become, particularly as technology companies commit enormous sums to AI infrastructure. The question is no longer simply whether AI can drive growth, but whether that growth can justify the investment required.
Amazon and Apple report later this week. Strong results could help steady the market, while disappointment could extend the recent pullback. For Australian investors, these earnings are an important test of the technology sector that has driven much of this year's global share-market gains.
Looking Ahead
The focus now turns squarely to the RBA’s decision on Melbourne Cup Day, 3 November, where this week’s hot inflation reading has tilted the odds towards a fifth hike. The remaining Big Tech results and the first read on US economic growth will round out the week, while oil and the Middle East, as ever, remain in the background.
Key Dates to Watch
RBA decision — 3 November: Next Tuesday’s rate call, now leaning towards a hike to 4.85% after the hot inflation data.
Big Tech earnings — this week: Amazon and Apple round out a week that tests the AI trade.
US growth & inflation data — Friday 29th: A first read on Q3 GDP and the Fed’s preferred inflation gauge.
Oil & the Middle East — ongoing: Still feeding into fuel prices and the inflation outlook.
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