European markets brace for Fed decision as hot Australia CPI, RBNZ surprise and oil rally stir nerves

It has been quite an eventful start to the day so far as the central bank bonanza rolls into town. That is putting inflation back in the spotlight with there already being plenty to digest before European traders get to their desks and before we even get to the main events later today.

To start with, we saw Australia's latest CPI report came in hotter than expected with trimmed mean inflation rising to 3.7%. That's not a good look and RBA governor Bullock was quick to respond in warning that inflation remains "far too high" . The numbers certainly strengthen the argument for another rate hike, with Bullock's response underscoring the narrative that the central bank is facing an increasingly uncomfortable inflation outlook.

As such, that is now seeing markets step up their pricing for the next RBA meeting on 3 November, with traders pricing in roughly 76% odds of a 25 bps rate hike.

Meanwhile, the RBNZ delivered arguably the bigger surprise of the session after keeping its official cash rate unchanged at 2.75% in a narrow 4-3 vote . Markets had been expecting a 25 bps rate hike today, so the decision has definitely caught traders off guard and sent the kiwi sharply lower. NZD/USD is down 1.1% to 0.5615 on the day currently.

Having said that, the central bank hasn't abandoned its tightening bias altogether as the minority continued to take on a more hawkish stance. But at least for now, the shock of the decision is the one that will be reverberating as the RBNZ conviction doesn't look as strong as markets had thought coming into today.

Apart from central banks, oil prices are also back on the move following a reported Houthi attack on a major Saudi refinery. Adding to that, the US has also reportedly warned of a possible short but intense military campaign against Iran after the midterm elections . So, that is pushing oil prices higher with WTI crude nudging back above $101 on the day.

That's a lot to take in already and put together, they're not helping with the inflation narrative - especially when the bond market continues to be rather nervous this week, despite the recent pullback in yields.

10-year Treasury yields are still holding around 5.01%, so that is keeping borrowing costs and equity valuations firmly in focus. And higher oil prices will only serve to complicate that picture further, potentially making it harder for central banks to bring inflation under control.

As we head towards European morning trade, do keep a close watch on Treasury yields and the broader risk sentiment. However, the day ahead will be all about the main events tom come later in US trading mostly.

The Fed decision is the obvious headline event but big tech earnings from Microsoft and Alphabet will be just as important in shaping the market mood. With yields still elevated and investors questioning the returns on massive AI spending , big tech names don't have too much room in disappointing markets .

This article was written by Justin Low at investinglive.com.