The Reserve Bank governor continues to convince the market that cash rates are heading higher. Meanwhile equity markets continue to rise. Oil prices were also up.

Economic data
While Tuesday’s NAB business confidence index declined 4 points, Wednesday’s Westpac-Melbourne Institute consumer confidence release saw the index rose 1.7%, reaching its highest level in over two years.

Reserve Bank Governor Glenn Stevens gave a speech in Perth on Thursday. Hawkish comments such as “interest rates need to be adjusted to a more normal setting” combined with the strength of consumer confidence the day before, led markets to price in a high probability of a 0.5% rate hike in November.

The October reading of the Investors Business Daily consumer confidence index was down 3.8% on the previous month. Retail sales fell 1.5% in September and, while this was somewhat better than forecasts for a 2.1% fall, the decline largely reversed the growth in sales in August.

US CPI for September was exactly in line with expectations, rising 0.2%, compared with 0.4% the month before. This brings the inflation rate for the year to -1.3%. Inflation excluding food and energy was also 0.2% for the month, but the rate for the year is positive at 1.5%. Industrial production for September rose 0.7%, beating expectations of a 0.2% rise. Since the “cash for clunkers” program was almost certainly a factor driving this figure, production may fall back in October.

Rates

Following Stevens’ comments, the market is now pricing in a cash rate of 5.38% in 12 months’ time, up 0.35% from the week before and up 0.78% from a month ago. The 3‑10 futures curve steepened 6.5 basis points. Two‑year government yields rose 0.29% and 10‑year yields rose 0.36%.

US short-end rates rallied in response to the weak economic data. The market is now implying a Fed funds rate 12 months from now of less than 1%, a fall of 0.43% over the week.

Credit
Credit performed well over the week. The Australian iTraxx  (series 12) rallied 11 basis points, while AAA-rated bonds spreads were largely unchanged and BBB‑rated bonds rallied an average of 11 basis points.

US CDX high-yield tightened 33 basis points. US CDX and euro iTraxx investment‑grade were both in 4 basis points.
Unlike recent weeks, the primary bond market was rather quiet, but an auto asset-backed deal was brought to market.

Other markets
The US dollar continued its decline, falling against all major currencies other than the Japanese yen. The Australian dollar finished the week up 0.71% at US$0.921.

Gold traded up and down in a 2% range, but finished the week unchanged at US$1,049/oz. Oil prices were very strong and the WTI crude oil spot price was up 9.4%.

US equities wobbled mid-week, but the S&P 500 managed to close up 1.9% despite falls on Friday. Australia’s S&P/ASX 200 was up 1.8%. The Nikkei 225 was up 2.4%. European markets were weaker and the UK’s FTSE 100 was only up 0.5% for the week.
The week ahead
The October minutes of the Reserve Bank board meeting are out and they will be closely scrutinised for hawkish sentiment. The Westpac leading index data for August is released on Tuesday, as is new motor vehicle sales data for September.

US housing starts for September will be released on Tuesday and the FHFA monthly house price index is out on Friday. The Federal Reserve will also be publishing its “Beige Book” commentary on economic conditions.