A flurry of positive U.S. economic data has investors scaling back expectations for how far the Federal Reserve will cut interest rates in coming months. Friday’s monthly jobs report will provide the next big clue as to the future direction of monetary policy.
Economists polled by Reuters expect U.S. employers to add 125,000 new jobs in October, down sharply from 254,000 in the previous month, compared to the consensus figure. It far exceeded my expectations. The unemployment rate is expected to remain flat at 4.1%.
Analysts have warned that the impact of recent hurricanes and strikes could make it difficult to parse the significance of upcoming jobs data. “Idiosyncratic factors risk disrupting the process of interpreting realized data,” BMO Capital Markets’ Ian Lingen wrote this week.
Still, the numbers will be closely scrutinized, especially since they will be released just days before Americans go to the polls in the presidential election on Nov. 5.
Following persistent signs of easing inflation and a softening labor market, the Fed cut interest rates by a significant half point in September, to a range of 4.75% to 5%. The move marks the central bank’s first rate cut since the 2020 coronavirus crisis.
But with signs of economic recovery and growing bets that Donald Trump will win an election that many see as likely to impact inflation, there is little doubt as to how far the Fed will ease monetary policy further. Questions have arisen.
Markets largely expect the Fed to cut rates by a quarter of a percentage point in each of the remaining two Fed decisions this year, but are also pricing in the external possibility that the Fed will leave rates unchanged at either meeting. Harriet Klarfelt
How will the bond market react to the UK budget?
The Labor government’s first Budget, due to be published on Wednesday, plans to borrow more to “invest, invest, invest” in the UK economy, with plans for one key stakeholder group – the debt buyers group. This will be an important test of whether or not it will be accepted.
Even before the party took power in July, bondholders were optimistic that a Labor government’s increased borrowing could be met by the market without triggering a Liz Truss-style crisis.
But in recent weeks, fears have been creeping into markets about changes to Britain’s fiscal rules that could pave the way for a bigger increase in borrowing than previously expected. This contributed to a decline in government bonds and spurred a decline in global bond prices, with the benchmark 10-year bond yield rising from 3.75% in mid-September to just over 4.2%. .
This Thursday, Chancellor Rachel Reeves confirmed that the government will start using a measure called ‘Public Sector Net Financial Debt’, a broader measure of the public balance sheet that includes assets such as student loans. did. This would give it room to borrow around £50bn more, based on previous figures, and keep it within its debt target, although it has no plans to spend the full amount.
On budget day, investors look at two things. One is how much the revised borrowing for the year to March, currently at £278bn, will increase. And second, what this decision has implications for future borrowing.
Tomasz Wiladek, chief European economist at asset management firm T. Rowe Price, said on the day the budget was announced that the government needed “credible forward guidance on future borrowing and guardrails on future borrowing to avoid adverse market impacts.” He said it may be necessary.
But now that fiscal rule changes have been announced, bond prices could rise if bond markets decide that the new chancellor’s wide-ranging spending and borrowing plans are prudent. Ian Smith
Will inflation in the euro area recover?
The currency bloc’s October inflation figures will be released on Wednesday, with investors gearing up for the latest clues on the path to eurozone interest rates.
Annual consumer price inflation is expected to recover to 1.9% after falling to a three-year low of 1.7% in September, according to economists’ forecasts compiled by Reuters.
The European Central Bank has already cut interest rates by three-quarters of a percentage point this year after inflation returned to its 2% target. A fourth similar move is expected in December, but if inflation data falls short of expectations, the market could increase bets on a bigger move of half a point, which is currently seen as a distant goal. .
SEB analysts said October’s data “will be key to determining the prospects for a rate cut of more than (0.25 percentage point) at the next meeting.”
“We and the ECB were clearly surprised by the widespread weakness in September,” he added. It is now believed that the September figures reflect a softening trend in service prices. . . Core inflation is now unlikely to rise in the fall. ”
The euro has fallen sharply against the dollar in recent weeks, buoyed by expectations that the U.S. Federal Reserve will cut interest rates lower than previously thought.
Some analysts believe that if the ECB chooses to cut rates more quickly, the currency could fall further from its current level of around $1.08 to parity with the dollar.
“A large part of the single currency’s resilience through much of this year has come from the belief that the ECB will be cautious about cutting rates,” said Jane Foley, currency strategist at Rabobank. “But this view is changing.” Leif Uddin
