Markets Weekly Outlook – US Elections and Central Banks Lead the Way

  • Global markets experienced a mixed week, influenced by geopolitical risks and US jobs data revisions.
  • The week ahead focuses on China’s Standing Committee meeting, the US election and Central Bank Meetings.
  • Wall Street indexes struggled, potentially due to high valuations and AI capital spend.

Week in Review: US Jobs Revised Downward After Positive GDP

A mixed week comes to a close as markets deal with renewed geopolitical risks and another downgrade to jobs numbers by the US Bureau Labor of statistics. US Earnings was another area that both surprised and disappointed as Wall Street fret about growing AI capital expenditure.

Six of the ‘Magnificent 7’ companies have already reported with revenue and profit beats but rising capital expenditure around AI continues to weigh on the minds of market participants. Amazon however soared on Friday as it shook off the blues of the Q2 earnings report and on course to post its best day since February, up around 6.5%. This helped Wall Street Indexes rise on Friday after the US open. Apple disappointed markets but the stock price held firm with the technology company down 0.5% on the day.

The NFP report did not paint a pretty picture as markets digested another significant downward revision to the previous two months data. The last two job reports were revised lower by a combined 112k jobs with the August report revised down by 81k and the September number by 31000. This has given the Fed more room on the rate cut front just as market participants were eyeing the possibility of less rate cuts moving forward.

Source: LSEG (click to enlarge)

When it comes to performance, the US Dollar Index saw four days of declines this week before a resurgence on Friday. This came as a surprise as market participants were pricing in more aggressive rate cuts which in theory should have led to further USD weakness. Are we seeing the US Dollars safe haven appeal returning?

Commodities saw Oil trickle higher for the majority of the week but finding hurdles consistently. Brent has been unable to close the gap it left over the weekend, but is still up around 2.5% for the week. Gold reached fresh highs before suffering a $60 drop on Thursday before steadying slightly on a Friday. Given the rising risks and geopolitics at play, it would take a brave person to hold onto gold shorts at present.

Wall Street Indexes have all struggled this week and are on course to finish in the red. The sky high company and index valuations may also be off putting to market participants.  Will US Indexes be able to stage a recovery in US Election and FOMC week?

The Week Ahead: China’s Standing Committee Meeting, US Election and Central Bank Meetings

Asia Pacific Markets

The week ahead in Asia will see focus pivot back to China, while rising tensions with North Korea need to be monitored as well.

In China, next week will be the meeting of China’s Standing Committee of the National People’s Congress, which will take place between 4-8 November. Markets are paying close attention to see if there will be changes to budget targets or details about new bonds. This would help understand the size of future financial plans. The slow start of this financial boost has lessened some of the initial excitement after monetary policy changes in September, but a big new financial package could bring back that enthusiasm.

Next week is relatively quiet for data releases. Trade data is expected on Thursday, where we anticipate export growth to slightly increase to about 5% year-on-year. However, we expect import growth to drop to -5.0% year-on-year after staying close to zero in the previous months.

Japan has just come off a busy week with next week expected to be much more subdued. Labor cash earnings will be a key release to watch as wage growth has been a key for the BoJ in its policy normalization efforts. Therefore a significant uptick here could add some strength to the struggling JPY.

The RBA are holding their interest rate meeting next week and this follows on from the inflation data this week. Inflation came in much better than expected, now at its lowest level since Q1 2021 with a print of 2.8%.

Markets appear convinced that despite the drop in inflation the RBA will keep rates on hold. Markets are pricing in around a 95.6% chance that the RBA keep rate on hold. Will we get a surprise?

Source: LSEG (click to enlarge)

Europe + UK + US

In developed markets, the European Union is enjoying a slight respite with the major data release being retail sales. There are also two speeches from ECB President Christine Lagarde, which after the recent bout of data may provide some insight into ECB policy moving forward.

The UK is set for another busy week after the Autumn Budget was released this week. A mixed bag and reaction to the budget heading into the BoE meeting leaves the British Pound in an intriguing position against many of its counterparts.

According to LSEG data, markets are pricing in around an 84% probability of a 25 bps cut next week which could send the British Pound lower.

The biggest events next week however are from the United States. The US Election is on Tuesday with the FOMC meeting following the very next day. The jobs data downgrades on Friday have really cemented rate cuts from the Fed at both the November and most likely December meetings.

The US Election is the one with the most uncertainty as polling has thrown up extremely mixed numbers. Betting websites have Donald Trump as the front runner, while a Reuters/Ipsos poll and a few others have Kamala Harris in the lead. The question is who prevails and what will the impact be? A trump win could help benefit Gold prices as market participants may use it as a hedge against the pending uncertainties.

Besides Gold we could see some wild swing in US Dollar pairs, Wall Street Indexes and potentially a knock on effect for markets as a whole as risk sentiment sways back and forth.

Chart of the Week

This week’s focus is back to Gold, following fresh highs and a significant pullback in what was a very choppy week.

There are of course factors supporting further increases in the Gold prices as global uncertainties continue to rack up.

Having made its run toward $2800 an ounce and falling short, this may see gold bulls make one final attempt at a test or breach of the $2800 handle.

A move higher from here will bring 2750 back on the table for the 2775 price level becomes an area of focus.

Conversely a move lower from here needs to break the 2724 handle before the 2714 and 2700 come into focus.

The RSI on the daily has finally left overbought territory which could be a sign of a shift in momentum. However, at present i would say, keep a close eye on geopolitical developments as this could have a major impact on markets over the weekend.

Gold (XAU/USD) Daily Chart – November 1, 2024

Source: TradingView.Com (click to enlarge)

Key Levels to Consider:

Support

Resistance

The Weekly Bottom Line: Canada’s interest rate conundrum; Too much of a good thing

Canadian Highlights

  • A call for a jumbo cut to head off mortgage reset rates must be assessed carefully. Surprisingly, roughly a quarter of mortgages will reset at a LOWER interest rate next year.
  • For those renewing into higher rates, the shock might be milder than expected, given a 30% increase in home prices and wages. Years of debt repayments have also built equity room, which homeowners, including those with variable-rate-fixed-payments mortgages, can use to lower payments if needed.
  • While rapid rate cuts can relieve mortgage pressures, they also stoke risks. Restoking housing demand, pulling forward consumer spending, weakening purchasing power and dampening investment through a softer loonie. Indeed, there is such a thing as too much of a good thing.

U.S. Highlights

  • The U.S. economy expanded by a robust 2.8% quarter-on-quarter (annualized) in the third quarter, only a touch slower than the 3% pace seen in Q2.
  • Growth in both income and consumer spending picked up in September while core PCE inflation held steady at 2.7% y/y.
  • Employment was essentially flat in October, with the economy adding a meager 12k jobs – well below the already-low 100k consensus estimate. The ongoing Boeing strike and disruptions related to Hurricanes Helene and Milton both weighed on the headline.

Canada – Canada’s interest rate conundrum: Too much of a good thing

Last week, we published on the Bank of Canada’s decision to deliver an outsized 50-basis-point interest rate cut. Some clients have commented that a faster descent is necessary to head off mortgage renewal risks. The concern is embedded in the lingering effects of the pandemic. In 2020, home sales shot up 40% in just twelve months as the Bank of Canada slashed the policy rate to near-zero. Homebuyers responded to a once-in-a-generation deal on mortgage rates. Now as 2025 approaches, those renewing a 5-year mortgage – the preferred term in Canada – could face sticker shock.

Chart 1 offers some comfort with three key messages:

First, it will likely surprise many that roughly a quarter of mortgages will reset at a LOWER interest rate. Many homeowners in the past two years selected shorter mortgage terms in the hopes that the Bank of Canada would be cutting rates as renewals hit. Good call! The savings will be tremendous. Depending on the institution, the current 5-year mortgage rate is between 4.0% and 4.7% compared to the prior average transaction rates of 5.8% to 6.9% for those folks. That’s a huge step down that will free up disposable income.

Second, the majority of mortgages coming up for renewal next year and in 2026 sit at an average rate of 2.5%. There will be upward pressure on monthly payments for these folks. However, not as much as you might think. Since 2020, Canadian home prices and wages have both risen by over 30%. And five years of debt paydown has created equity room that could be taken back up if homeowners want to mitigate the increase in monthly mortgage payments by extending their amortization.

The benefits of lower rates and higher equity hold true for variable rate mortgage holders too. Those with variable payments have already experienced some rate relief due to 125 basis points in interest rate cuts so far. For a $500,000 mortgage, this translates to a $370 reduction in the monthly payment. For borrowers whose payments do not adjust with rate changes, these reductions will bring benefits at renewal in the form of either lower monthly payments or a shorter amortization period. Moreover, it appears that this group is faring better than initially anticipated when analysts looked at the data a year ago. Many borrowers have proactively increased their payments, effectively reducing their average amortization period by a full year (Chart 2).

Lastly, financial risks are further lowered than many Canadians presume due to past macroprudential rules. Canada’s mortgage stress test requires mortgage applicants to qualify not at their contract rate, but at an interest rate that is two percentage points higher, or a floor rate of 5.25%, whichever is higher. With the 5-year mortgage rate floating at around the 4% mark, homeowners who secured rates in the 2% range in 2020 remain within the scope of that stress test. If they qualified then for a mortgage, they should be sitting in a better spot today with the benefit of time and wage gains, presuming there hasn’t been a change in the household income status. Given the lack of job losses in the job market, this assumption holds true for most.

Bottom line, when rates were rising rapidly, mortgage renewals were on everyone’s mind as a key risk that required flagging by the Bank of Canada. But it no longer presents itself as that lurking monster of 2025. By extension, it’s not the smoking gun for ongoing 50 basis point rate cuts. It’s important to balance the two-sided nature of risks. The other side is inadvertently restoking the housing market, leading to a new cycle of restrained affordability and debt accumulation. The Bank must also be mindful of underestimating the spending impulse. A more rapid rate-cut cycle will pull forward or front load consumer spending relative to a gradual cycle. Because data is lagged, by the time it’s readily observed, the momentum impulse could be stronger than anticipated and require course correction. And finally, caution is warranted in creating too wide an interest rate spread to the U.S.. The loonie has already broken below a technical threshold by dipping below 72 cents. Chronic weakness reduces Canada’s purchasing power abroad, which can become counterproductive to investment because firms source a significant amount of machinery and equipment from other countries.

We must remember, there is such a thing as too much of a good thing.

U.S. – The U.S. GDP data delivers treats, but the payrolls report plays tricks

Next week all eyes will be on the U.S. elections and the Federal Reserve meeting. However, this week the focus has been on the health of the U.S. economy – an important reference point for both presidential candidates and the Fed.

Wednesday’s advanced GDP report showed that the U.S. economy is alive and well. Coming on the heels of the solid 3% gain in Q2, the economy expanded by 2.8% (quarter-over-quarter annualized) in Q3. Consumers were the belle of the ball, with spending accelerating to 3.7%, or the fastest pace since Q1 2023 (Chart 1).

This ongoing resilience was further echoed in September’s personal income and spending report. It showed that spending increased by 0.5% m/m in September, outpacing income and indicating that consumers kept their purse strings open as Q3 wrapped up. Lower prices at the pump in recent weeks may have boosted confidence, giving consumers some reprieve from the ever-rising prices elsewhere. On that front, core PCE deflator – which excludes food and energy – rose 0.3% m/m in September. This held the twelve-month change steady at 2.7% for the third consecutive month, but this was largely due to “base effects”. Importantly, the 3-and-6-month annualized rates of change sit just above the Fed’s 2% inflation target, suggesting we’re likely to see more downward pressure on the year-ago measure in the months ahead.

As we noted in a recent report, there are several reasons consumers may have more momentum than previously anticipated, such as a notable upgrade to personal income in first half of 2024 and a larger buffer of savings. However, the savings cushion is quickly dwindling, with the personal saving rate having now declined for three consecutive months. This suggests we’re likely to see some moderation in consumer spending to something more consistent with a trend-like pace of around 2% in the months ahead.

On that note, October’s payroll report was expected to be a weak one, but still surprised to the downside. The economy added just 12k jobs in October, well below the expectation for a 100k gain, while. Adding to the disappointment, downward revisions shaved 112k from the two prior months’ gains. The ongoing Boeing strike helped to cut over 40k from the headline number in October, while Hurricanes Helene and Milton also likely had a heavy hand weighing down the payrolls figure.

As a result, the Fed will likely look through October’s noisy employment data, and instead focus more on the broader trends showing that the labor market is decelerating but not necessarily deteriorating. Moreover, with the Fed’s preferred wage metric – the Employment Cost Index – showing wage pressures now growing at a pace roughly consistent with 2% inflation, the FOMC should have all the confidence they need to continue to gradually reduce the policy rate. We expect the Fed to cut by 25 basis-points at next week’s meeting. While this decision seems almost certain, the U.S. elections remain a wild card, promising to keep everyone on edge until the final votes are tallied.

Weekly Economic & Financial Commentary: What Goes Up, Must Come Down

Summary

United States: It’s Halloween. Everyone’s Entitled to One Good Scare.

  • Nonfarm payrolls rose a much weaker-than-expected 12K in October. Worker strikes and hurricanes played a major role in the headline miss. The unemployment rate, which is derived from the household survey and counts those not working due to a strike or severe weather as employed, held steady at 4.1%. A 25 bps rate cut at next week’s FOMC meeting remains highly likely.
  • Next week: ISM Services (Tue.), Nonfarm Productivity (Thu.), Consumer Sentiment (Fri.)

International: Bank of Japan Holds Policy Steady Amid Political Uncertainty

  • It was a remarkable week in Japanese politics as the Liberal Democratic Party (LDP) suffered its first major loss in the country’s lower house in more than a decade. As a result, we see political uncertainty persisting in the coming weeks. It is against this backdrop that the Bank of Japan held monetary policy steady this week. Looking ahead, we remain comfortable with our forecast for the next 25 bps rate hikes to come at the January 2025 and April 2025 meetings.
  • Next week: Brazil Selic Rate (Wed.), Riksbank Policy Rate (Thu.), Bank of England Policy Rate (Thu.)

Interest Rate Watch: What Goes Up, Must Come Down

  • We expect the FOMC to elect to reduce the federal funds rate 25 bps at next week’s monetary policy meeting. Economic growth has generally remained solid since the Committee last met in September, but the restrictive stance of policy today supports a further reduction.

Credit Market Insights: Refinancing Activity Slows Down Amid Pickup in Mortgage Rates

  • Mortgage rates have risen sharply over the past weeks despite expectations the start of the Fed’s rate cutting cycle would help ease pressure on financing costs for home buyers. As a result, refinancing activity that had once picked up has since tumbled back down to this summer’s lows.

Topic of the Week: The Election Is Near; Is Consumer Confidence Poised for a Rebound?

  • The U.S. presidential election, a major source of uncertainty for consumers, is less than one week away. It is instructive to explore how consumer confidence levels have rebounded following November elections in previous cycles and how this cycle compares.

Full report here.

Hiring Demand to Weigh on Canadian Jobs Data, U.S. Fed to Cut Again

We think Friday’s Canadian employment report should tell a familiar story—that the labour market has continued to weaken in October amid slowing hiring demand. Employment is still expected to increase, but not by much. We expect 15,000 jobs were added, but that would again undershoot growth in the labour force and population, and push the unemployment rate back up to 6.6% after a tick lower to 6.5% in September.

Leading indicators for employment conditions in Canada are still sending weak signals. Job openings have already dropped below pre-pandemic levels, and are still plunging. Business hiring intentions, according to the Bank of Canada’s latest Business Outlook Survey, have remained soft in Q3 driven by a subdued sales outlook over the next 12 months. Looking forward, we think unemployment will continue to rise in Canada to 7% by early 2025 before trending lower on a recovery in hiring demand.

The U.S. economic backdrop ahead of the Federal Reserve’s interest rate decision on Wednesday is very different, and much stronger.

Another solid increase in Q3 gross domestic product last Thursday extended a string of resilient U.S. economic data compared to other advanced economies. Still, labour markets have shown signs of cooling. The unemployment rate has inched higher, but very gradually, which is consistent with a normalization from overheated levels rather than faltering. An unusually large government budget deficit—which would likely increase under campaign pledges from both major presidential candidates in the week’s elections—will keep a floor under the economy and inflation in the year ahead.

Interest rates are still likely higher than they need to be for inflation to return fully back to the Fed’s 2% inflation target. We expect the Fed to cut interest rates by another 25 basis points on Wednesday. Beyond that, we expect a 25-bps cut at each of the next two policy decisions in December and January before a pause. That leaves the Fed funds range at 4% to 4.25% for the rest of 2025.

Week ahead data watch

We look for Canadian trade deficit to narrow to $200 million in September, led by lower imports and higher exports. Oil prices were down significantly by 8.3% in September, lowering the energy trade balance. Rail activities were disrupted by the strike in August, but that decline should reverse in September, boosting exports.

The U.S. trade deficit likely widened to US$87.9 billion in September. According to the advance indicators, goods deficits were up US$14 billion from August, mainly due to falling exports (-2%), and higher imports (3.8%) during the month.

RBA in Wait-and-See Mode Despite Drop in Inflation

    • RBA to stand pat at 4.35%
    • Aussie may not be affected from this meeting
    • Decision due on Tuesday at 3:30 GMT

RBA policy to remain unchanged

The upcoming Reserve Bank of Australia (RBA) policy meeting on November 5 is highly anticipated, with the bank adopting a wait-and-see approach and holding the cash rate steady while monitoring economic developments. The focus will be on ensuring that inflation continues to decline and that the economy remains on a stable growth path, with potential rate cuts anticipated in early 2025 if conditions improve.

Inflation ticks down within target

Recent inflation figures show a mixed but overall encouraging pattern. In the September quarter, the headline inflation rate dropped to 2.8%, the lowest level in three and a half years. Significant drops in fuel and electricity prices, aided by government rebates, drove this decline. However, underlying inflation, measured by the trimmed mean, remains above the RBA’s target band at 3.5%. This persistent core inflation suggests that the RBA may need to maintain a cautious stance as service sector inflation, particularly in rents, insurance, and childcare, continues to exert upward pressure.

GDP and economic growth

The development of Australia’s GDP has been modest. The June quarter of 2024 saw a 0.2% q/q increase in economic growth, which is consistent with the ongoing trend of gradual but consistent expansion. The weakest annual growth since the early 1990s, with the exception of the pandemic period, was 1.5% in the 2023–24 fiscal year. Although government expenditure has provided some support, this lethargic growth is a result of subdued household consumption and a decline in discretionary spending.

Various factors, including international economic conditions, domestic inflation patterns, and labor market robustness, will influence the RBA’s decision. The recent decrease in headline inflation is promising; however, the RBA remains vigilant about the stickiness in underlying inflation and its possible effects on the economy. The GDP data underscore the necessity for ongoing support to foster economic growth and tackle the difficulties confronting households and companies.

Aussie stands near critical area

Investors will closely scrutinize the language and tone of the RBA’s statement, even though the immediate decision to hold rates might not cause significant movement. Investors will look for clues about future monetary policy direction, which will influence the Aussie’s trajectory in the coming months.

Aussie/dollar rebounded off the 0.6535 support level, which overlaps with the medium-term uptrend line, with the next strong resistance coming from the 200-day simple moving average (SMA) near 0.6620. However, a tumble beneath the diagonal line could open the way for a test of the bearish spike of 0.6360, achieved on August 5.

Week Ahead – US Election Draws All Eyes, Fed, RBA and BoE Meet

  • Traders lock gaze on Tuesday’s US election
  • Trump and Harris battle neck and neck in final stretch
  • Fed to decide whether to cut interest rates
  • RBA and BoE decisions are also on next week’s agenda

The US dollar flexed its muscles lately on the back of upbeat data suggesting that there is no need for the Fed to deliver another bold 50bps rate cut at the remaining gatherings of the year, but also due to increasing market bets that Donald Trump will return to the White House.

It’s US election time!

The day when US citizens will decide whether this will be the case or not has come. While some Americans have already casted their vote, the official election day is on Tuesday, with candidates Donald Trump and Kamala Harris battling neck and neck for the Oval Office. Although Harris entered the race with a decent lead, the gap narrowed significantly over the past days, with the outcome hinging on battleground states.

Trump has pledged to cut taxes and impose import tariffs, especially on Chinese goods, policies that are seen as inflationary.  Therefore, a Trump victory may raise speculation for even slower rate reductions by the Fed and thereby drive Treasury yields and the US dollar even higher.

The question is how the stock market will perform. Tax cuts and deregulation may be positive developments for Wall Street, but tariffs and slower rate cuts are not. Thus, even if stocks trade north just after a potential Trump win, a pullback may be on the cards in the not-too-distant future.

With the dollar and Wall Street gaining on increasing bets of a Trump win, a potential Harris victory may have the opposite market impact as her plans do not include massive tax cuts as Trump is promising. Having said that though, whether any policies will be implemented will depend on the composition of the Congress.

What will the Fed do after the election?

We may get a first idea on how the election outcome may affect the thinking within the Fed just two days later as on Thursday, the Committee announces its monetary policy decision. With the latest US data pointing to improvement and no need for a back-to-back bold rate cut, investors are now penciling in 25bps reductions at both this and the December gatherings.

That said, a 25bps reduction next week may not be a done deal as a hot NFP report later today and a Trump victory on Tuesday could convince more policymakers to agree with Atlanta Fed President Raphael Bostic who said a few weeks ago that he is totally comfortable with skipping a meeting. They could skip it next week or deliver the expected reduction in order not to catch investors off guard and hint at a December pause. After all, according to Fed funds futures, there is a 30% chance for a pause in December if a cut is delivered next week.

Taking into account the current market pricing, both cases argue for further gains in the US dollar. For the greenback to come under strong selling interest, Fed policymakers need to sound worrisome about the state of the US economy and signal that aggressive easing is needed for the months to come. Such a scenario seems unlikely though.

RBA and BoE also on next week’s agenda

The Fed gathering is not the only monetary policy decision on next week’s agenda. The ball will get rolling during the Asian session on Tuesday morning with the RBA, while on Thursday, ahead of the Fed, it will be the BoE’s turn to decide on interest rates.

RBA could remain on hold for a while longer

At their latest decision in September, RBA officials kept interest rates untouched, noting that underlying inflation remains too high and that their projections show that it will be some time before it is sustainably within the Bank’s target range. The Board noted that they will continue to rely on data and that they will do whatever is necessary to achieve price stability.

With the Melbourne Institute (MI) still suggesting that inflation will hover around 4.0% in 12 months, it is hard to envision an RBA policy strategy like other major central banks, which have already begun slashing rates. Indeed, market participants are pencilling only a 20% chance of a 25bps reduction by the end of the year, while such a move is fully priced in for May.

So, investors will dig into the statement to see whether they are correct in predicting that this Bank will remain on hold for a while longer. If their views are confirmed, the aussie may instantly gain some ground, but its latest downtrend against the almighty US dollar is unlikely to be reversed, at least not until investors get convinced that China will proceed with meaningful measures to shore up its economy.

A BoE rate cut seems increasingly likely

Passing the ball to the BoE, at their September meeting, policymakers of this Bank decided to keep interest rates unchanged at 5.0%, noting that they will be careful about future rate cuts.

Nonetheless, a few weeks after the decision, BoE Governor Bailey said that they may need to be more active with rate cuts if the data continued to suggest progress in inflation, and indeed, the September numbers revealed that the headline CPI slipped to 1.7% y/y from 2.2%, while the core rate dropped to 3.2% y/y from 3.6%.

This prompted market participants to assign a strong 80% probability for a 25bps reduction at next week’s gathering, but the chances of this Bank following with another quarter-point reduction in December rest at around 30%.

Therefore, a rate cut on its own is unlikely to shake the pound much. The spotlight may fall on the voting and policymakers’ communication. If the votes reveal that the decision was a close call and the statement points again to no rush in further reductions, the pound could gain ground. The opposite may be true if it is agreed that more rate cuts are needed in the months to come.

New Zealand and Canadian jobs data

Elsewhere, the New Zealand and Canadian employment reports are due to be released on Tuesday and Friday respectively. The RBNZ is expected to proceed with a back-to-back 50bps reduction on November 27, with investors assigning a decent 15% chance for a bigger 75bps cut. The BoC also cut rates by 50bps last week, but it is now seen slowing back to quarter-point reductions, with a 35% chance pointing to another double cut.

Having that in mind, weak jobs data from these nations could convince more market participants to bet on the bolder action for each of those two central banks.

Fed Preview: Navigating Uncertain Waters

  • We expect the Federal Reserve to cut rates by 25bp at the November meeting, which is nearly fully priced in by the markets at the time of writing.
  • US October Jobs Report and Election Date pose significant risks to both sides of current rates outlook. We think the Fed is more likely to change its forward guidance than its rate decision next week in case of data / political surprises.
  • Markets are pricing around 30% probability of a pause in December, but we still think 25bp cuts will continue in every meeting until June. More expansionary fiscal policy stance post-election could warrant an earlier end to the cutting cycle but is unlikely to affect rate decisions over the coming few months.

It is unlikely to be exaggeration to say that the six days in between publishing this report and the FOMC’s rate decision come with historical levels of uncertainty. First, October Jobs Report will provide markets with the latest sense of resilience in US labour markets, and we look for a clear slowdown in nonfarm payrolls growth (+130k, Sep +254k). Any surprises should be interpreted with caution, though, given the long list of potential distortions related to weather, strikes and seasonality (read our preview from RtM USD – EUR/USD faces downside risk ahead of key events, 29 October).

But all eyes are naturally already on the US elections on 5 November. Donald Trump approaches the election as the slim favourite at least according to the prediction markets, but swing state polls remain extremely close. Pennsylvania and Wisconsin do not allow early counting of mail-in ballots which means they will likely be among the last states where results will be called. In 2020, Michigan was also called only around midnight European time between 6 and 7 November, and as Trump needs to win at least one of the three states, the results might only get confirmed within 24 hours of the rate decision.

In the past, the Fed has occasionally provided ‘unofficial’ guidance via select news outlets if data releases surprised sharply during the blackout. We think the bar for altering the outlook for the well telegraphed (and nearly fully priced in) 25bp move next week remains high due to the election. If the Jobs report (or change in expected fiscal policy stance) would warrant a shift in monetary policy, we expect the Fed to still move ahead with the 25bp cut and communicate any changes to the outlook in the form of more dovish/hawkish forward guidance during the meeting. The Fed will not publish new economic or rate forecasts so markets full focus will be on Powell on Thursday night.

At the time of writing, markets are pricing around 30% probability of the Fed pausing its easing cycle in December. If Republican sweep allows for more expansionary fiscal policies going forward, we would be inclined to call for a shorter easing cycle (e. g. removing cuts from the end of the forecast) but still call continuing cuts in the near-term. Rising odds of a Republican sweep have lifted the level of term premium priced into the USD curve, which together with stronger USD FX has contributed to a net tightening in financial conditions. Current level of policy rate remains well above FOMC’s range of estimates for the neutral rate, and with inflation expectations broadly close to target, we do not see strong reasons for delaying the cuts for longer.

Weekly Focus – All Eyes on US Election and Central Banks

This week’s data showed continued growth in the US and euro area in Q3, with the US GDP rising 2.8% q/q SAAR and euro area GDP increasing 0.4% q/q, surpassing expectations. Growth in the euro area was influenced by the Olympics in France and a revision of Germany’s Q2 GDP. Without these factors, growth in these economies was flat, while Spain showed robust growth. In China, the October composite PMI rose to 50.8, signalling a recovery from the summer slump, driven by gains in both manufacturing and non-manufacturing sectors.

Tensions in the Middle East remain elevated after Israel retaliated against Iranian military sites following an attack on 1 October. However, the targeted response, which avoided energy infrastructure, was seen as less provocative, leading to a drop in oil prices. In Japan, the ruling coalition lost its Lower House majority, creating political uncertainty as it now requires support from other parties, which have criticized recent Bank of Japan (BoJ) rate hikes. Despite this, we expect the BoJ to continue rate hikes in December, as indicated at this week’s meeting, even though rates were left unchanged. In the UK, the Labour government’s first budget revealed a significant increase in borrowing over the next five years, pushing 10-year Gilt yields 20bp higher and reducing expectations for a back-to-back rate cut by Bank of England in December.

Euro area inflation increased to 2.0% y/y in October (cons: 1.9%, prior: 1.7%) driven by energy and food inflation, while core inflation was unchanged at 2.7%. Core inflation rose 0.20% m/m s.a. driven by still elevated service price increases of 0.30% m/m s.a. while goods prices remained unchanged at 0.0% m/m s.a. The October data thus showed that the very soft services inflation registered in September was a “blip” and inflation dynamics remain the same as we saw in the first months of Q3, namely with momentum in underlying inflation heading slowly in the right direction. Services inflation remains sticky on the back of elevated wage growth, which is supported by the strong labour market as also indicated by the unemployment rate, which dropped to an all-time low of 6.3% in September.

Next week, all eyes are on the US election. The first state results are expected a couple of hours past midnight on Wednesday European time, and by morning, around 70% of states had been called in the previous 2020-election. Donald Trump is the favourite to win the presidential election according to prediction markets, Republicans are expected to win majority in the Senate elections and House elections remain highly uncertain. The final swing state polls pointed towards a very close race for the White House and results from Pennsylvania, Michigan and Wisconsin, where results are likely to be known only late Wednesday, will likely play a key role in the outcome. We host two webinars on the morning Wednesday 6 November, which you can sign up for here and here.

On Thursday, focus turns to central banks as both Fed, BoE, Norges Bank, and the Riksbank have meetings. We expect both Fed and BoE to cut rates by 25bp in line with analyst consensus and market pricing. In both places, focus will be on forward-looking guidance especially in the UK after the recent jitters caused by the government’s budget. For details, see Fed preview: Navigating uncertain waters, 1 November. On Friday, we should finally get the actual numbers on China’s fiscal stimulus, which Reuters sources this week said could be 10 trillion yuan in extra debt the coming years.

Full report in PDF.

US: Payrolls Disappoint in October, But Unemployment Rate Holds Steady at 4.1% 

Non-farm employment rose a meager 12k in October, well below the consensus forecast calling for a gain of 100k. Job gains over the two prior months were revised lower by 112k.

  • The Bureau of Labor Statistics noted that Hurricane’s Helene and Milton “likely” affected estimates in some industries, though did not provide any point estimates.
  • Over the past three months, payroll gains averaged 104k, well below the 194k averaged over the prior twelve-month period.

Private payrolls were lower by 28k in October, with the largest declines seen in professional & business services (-47k) – all related to a pullback in temporary help (-48.5k) – and manufacturing (-46k), though this was largely due to the ongoing Boeing strike. Meanwhile, education & healthcare (+57k) and government (+40k) recorded solid gains last month. Job creation across most other industries was relatively flat.

In the household survey, a sharp decline in civilian employment (368k) largely offset a pullback in the labor force (-220k), keeping the unemployment rate steady at 4.1%. The labor force participation rate fell 0.1 percentage points to 62.6%.

Average hourly earnings (AHE) rose 0.4% month-on-month (m/m), a modest acceleration from September’s downwardly revised reading of 0.3% m/m. On a twelve-month basis, AHE were up 4.0% (from 3.9% in September).

Key Implications

Between the ongoing Boeing strike and the devastating impacts of Hurricane’s Helene and Milton, we knew this was going to be messy employment report. While the Bureau of Labor Statistics didn’t provide any point estimates of hurricane impacts, they did note that the storms “likely” had some impact on last month’s figures. Putting that aside, revisions to prior months were meaningfully lower, which on top of October’s disappointing reading pulled the three-month moving average down to 104k, well below what’s required to meet current growth in the labor force. However, given the various factors impacting last month’s numbers, it’s too early to draw any meaningful conclusions from today’s report.

Other data out this week continued to point to a labor market that is decelerating but not necessarily deteriorating. Job openings continued to trend lower in September while hire and quit rates are now at or below pre-pandemic levels. This has helped to pressure compensation growth lower, with the Employment Cost Index slowing to 3.9% on a year-ago basis in the third quarter. Amid the ongoing pickup in productivity, this suggests the Fed’s preferred wage metric is now growing at a pace broadly consistent with 2% inflation. This should give policymakers all the confidence they need to gradually reduce the policy rate by quarter-point increments at each of its upcoming meetings.

It is time for NFP

In focus today

In the US, focus will be on US October Jobs Report. We think non-farm payrolls growth slowed down to 130k (Sep: 254k) both due to weather-related distortions and less favourable seasonal adjustment. Average monthly earnings growth likely slowed down to 0.2% m/m s.a. and unemployment rate remained steady at 4.1%. Later, markets will also closely follow the ISM Manufacturing index for October, the flash PMIs pointed towards still stagnating growth in the manufacturing sector.

In Sweden, PMI for the manufacturing sector is due at 08:30 CET. The overall index has hovered above the 50 level for most of the year and at 51.3 in September. However, the very weak NIER survey alongside declining new orders and rising delivery times suggest that there could be a setback in PMI as well, possibly below the 50-threshold. If PMI drops, it will add another ‘soft activity’ argument for the Riksbank to cut by 50bp next week.

In Norway, we receive the unemployment rate for October. The Norwegian labour market remains relatively tight, with continued growth in employment and only a moderate rise in unemployment, even though growth has been weak for more than a year. This is resulting in productivity growth being weak, and partly negative. We expect that unemployment will continue to rise moderately beyond 2025 even if growth picks up as productivity picks up. We also believe that this tendency was visible in the October figures, but the unemployment rate was most likely unchanged at 2.1% s.a.

In Switzerland, inflation figures for October will be released at 08:30 CET. Consensus expects headline to remain unchanged at 0.8% in October (vs the SNB Q4 forecast at 1.0% y/y) and similarly for core to stay put at 1.0%.

Economic and market news

What happened overnight

In China, Caixin PMI rose to 50.3 in October (cons: 49.7, prior: 49.3) largely helped by stimulus measures helping pick up the economy. The manufacturing activity expanded for the first time since April, indicating signs of economic stabilization. This supports the picture painted by the official PMIs for October, which also suggested economic recovery.

What happened yesterday

In euro area, HICP inflation in October came in at 2.0% in October (cons: 1.9%, prior: 1.74%). The increase was driven by energy inflation and food prices while core inflation was unchanged at 2.68% y/y (cons: 2.6%, prior: 2.66%). The increase in core inflation of 0.20% m/m s.a. was mainly driven by service prices rising 0.3% m/m with goods prices unchanged at 0.0% m/m. The October release mimics the picture we saw in the recent months (except September) of underlying inflation slowly moving lower amid a still elevated services price pressure but clearly absent goods price inflation. It shows that the very soft data in September was only a “blip”. As momentum in inflation is still heading in the right direction, but not as fast as the September data suggested, today’s inflation data supports the case for a 25bp cut by the ECB in December against a “jumbo” cut.

The unemployment rate declined to an all-time low of 6.3% in September (cons: 6.4%, prior: 6.4%). However, the number of unemployed persons rose slightly by 13k indicating an overall stagnant labour market but at a historically strong level. The small increase in the number of unemployed persons was due to France while the number in Germany surprisingly fell in Eurostat’s measure. The hard data on labour market remains strong also supporting the case for gradual cuts by the ECB.

In the US, the September PCE data came out close to expectations, with core PCE price index increasing by 0.3% m/m (cons: 0.3, prior: 0.1%). Core services PCE inflation picked up slightly from the previous month with 0.3% m/m s.a. (prior: 0.2%) but nothing dramatic. We also got the latest weekly jobless claims surprising to the strong side with 216k (prior: 227k) and the Q3 Employment Cost Index surprising to the downside (wages and salaries up +0.8% q/q, from +0.9%). Even if the decline in jobless claims could reflect fading weather-effects, the data overall supports the soft-landing story. Cost pressures are fading but broader labour market conditions remain solid.

In the UK, in response to UK budget concerns GBP was one of the big losers yesterday, with EUR/GBP breaking through the 0.84 mark, and UK yields continued climbing. We think that ultimately concerns will fade, and markets will calm with BoE meeting coming up on Thursday. However, we acknowledge that the expansionary budget, primarily funded through increased borrowing coupled with recent rise in borrowing costs makes the case for fiscal sustainability increasingly difficult. This may lead to a pull-back on certain measures from the Labour government.

In the Middle East, while there seems to be some optimism around a 60-day pause in fighting for Lebanon, Hamas announced yesterday that they will reject any offer that would not bring a permanent end to the war in Gaza. Meanwhile, in Iran, two top officials said that the country plans to respond to Israel’s missile attack. Whether and how Iran would respond, remains unclear. Israel’s recent attack severely damaged Iran’s defence capabilities, and hence, it is now more vulnerable to any attacks coming from Israel. Anonymous government sources in Iran said that they are preparing a list of military targets in Israel but that the attack would very likely happen only after US election.

Equities: Global equities declined yesterday, marking the first significant drop in a while, with pronounced sector disparities and again not driven by macroeconomic factors. Although realized earnings data remains solid, this have not sufficed to meet the elevated outlook expectations, particularly for technology companies. The global technology sector experienced a 3% decrease yesterday, with the US suffering the most significant losses in the regional comparison. It is also noteworthy that the VIX index escalated to 23 and the MOVE index reached a new year-to-date high, despite yields being relatively flat yesterday. Given the massive influx of macro and micro news we are currently receiving, investors are evidently anxious, particularly with the impending 5 November US election, leading to derisking and event hedging. In the US yesterday, the Dow fell by 0.9%, the S&P 500 by 1.9%, Nasdaq by 2.8%, and the Russell 2000 by 1.6%. Asian markets are in the red this morning, led by Japan, which is down approximately 2.5%, while Chinese markets are bucking the trend. US and European futures are trading higher this morning, ahead of another eventful day.

FI: Yesterday’s session was a bit volatile with 10Y US Treasuries rising 5bp early in the day, before falling back to the starting point yesterday at 4.30%. We saw almost the same picture in the European market, where government bond yields initially rose before declining in the afternoon. The Bund ASW-spread continues to grind tighter and as discussed in our weekly, a test of the 0bp-level seems reasonable.

FX: EUR/USD drifted to the upper end of the 1.08-1.09 range. USD/JPY declined following a BoJ hold with a slightly hawkish tone. EUR/GBP rose above 0.84, as GBP was among the big losers in yesterday’s session, with UK budget concerns continuing to weigh on the currency. EUR/SEK remains around 11.60. October was an abysmal month for SEK, with losses close to 3% vs. EUR and over 5% vs. USD. EUR/NOK is approaching the 12.00 mark, trading just below.