The Week Ahead
This week’s FOMC minutes release (Wed), US CPI (Thu) and PPI figures (Fri), and quarterly bank earnings could shed more light on the Fed’s easing path. Eurozone retail sales and Germany’s factory orders are due today. China reopens following its week-long holidays, and Germany’s industrial production and US trade data may be of interest on Tuesday. US CPI takes centre stage on Thursday, the final reading ahead of the US presidential elections. Current expectations are that the headline figure rose 0.1%mom and 2.3%yoy in September, with the core readings forecast to have risen to 0.2%mom and 3.2%yoy. The French government will present its budget bill for 2025 on Thursday. German CPI, UK industrial production and GDP and US PPI and Uni. of Michigan consumer sentiment will garner market focus on Friday. With the US election less than one month away, we could experience pockets of volatility given the tight race.
This week’s central bank chatter includes the ECB’s Cipollone, Escriva and Lane, and the Fed’s Kashkari, Bostic and Musalem on Monday. Bostic speaks again on Tuesday, and we will hear from his counterpart Collins, and the ECB’s Kugler and Schnabel. The FOMC minutes could give further clues as to the Fed’s thinking on Wednesday, as could comments from the central bank’s Logan, Bostic, Goolsbee and Daly. The Fed’s Williams and Riksbank’s Thedeen speak on Thursday. The Fed’s Logan and Goolsbee close the week on Friday.
Clearly the main event for markets was the US employment report on Friday. However, ahead of that we had a series of mixed data including a strong JOLTS job openings figure and better than expected ADP reading. On the flipside, the September ISM manufacturing remained in contraction at 47.2, falling below expectations. Of note was also the huge drop of ISM prices paid into contraction territory, and unexpected fall in the ISM employment figure (to 43.9), while new orders were marginally stronger. Later we had a huge upside surprise on the ISM services index reading (54.9, from 51.5). Interestingly the prices paid, and new orders components were very strong, while employment fell into contraction. All of that was “yesterday’s news” once the robust US job’s report (coupled with upward revisions) smashed expectations: 254K jobs were added in September (exp. 150k); unemployment fell to 4.1% (exp. 4.2%); and average hourly earnings rose 4%yoy (exp. 3.8%). Markets therefore pared rate cut expectations, however, still pricing in two further 25bp cuts this year, on Friday’s close.
Markets whipsawed on Friday, yields across the US Treasury curve rose; the 2-year yield rose 36bps to 3.92% the 10-year benchmark rose 22bp to 3.97% over the week. Meanwhile, risk assets gained, the S&P Index gained 0.22%. Given the growing Iran-Israel-Lebanon tensions oil spiked higher; Brent gained 8.43%, closing at $78.05pb. The dollar benefited from a 2.13% rally amid safe haven flows and a reduction in rate cut expectations by the Fed.
Closer to home, sterling suffered a fall following the BoE’s Governor Bailey’s surprisingly dovish comment regarding potentially more aggressive rate cuts. Later the central bank’s Chief Economist Pill advocated for a cautious approach to interest rate cuts, contrasting with Bailey's suggestion of potentially more aggressive reductions. Pill emphasised the importance of avoiding cuts that are too rapid or extensive, citing concerns about persistent inflation pressures in the UK economy. His remarks, which included worries about service sector inflation and wage growth. The divergent views from top BoE officials caused fluctuations in the value of sterling, highlighting the market's sensitivity to central bank signals ahead of the anticipated rate cut in November.
The euro also came under pressure last week, falling from its recent 14-month high as market sentiment shifts. Traders are now expecting an imminent ECB rate cut, spurred by cooling inflation and lacklustre business indicators. This development contrasts with earlier predictions that the ECB would be slower than the Fed to lower rates. The euro area's inflation dropped below the 2% target, to 1.8%yoy in September, down from 2.2%yoy. The core reading eased to 2.7%yoy.
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