Weekly Market Outlook (07-11 October)

Upcoming events:

• Monday: Retail sales in the euro area. (China is on vacation)
• Tuesday: Japan’s average cash earnings, RBA minutes, and US NFIB small business optimism index.
• Wednesday: Reserve Bank of New Zealand policy decision, FOMC meeting minutes.
• Thursday: Japanese Producer Price Index, European Central Bank Minutes, US CPI, US Unemployment Claims, New Zealand Manufacturing PMI.
• Friday: UK GDP, Canadian Labor Market Report, US Producer Price Index, University of Michigan Consumer Confidence, Bank of Canada Business Expectations Survey.

Tuesday

Japan’s year-on-year average cash income is expected to reach 3.1% versus 3.6% previously. Wage growth has recently turned positive in Japan, and this is something the Bank of Japan has always wanted to see to achieve its inflation target sustainably. The data should not change much for the central bank at the moment as it wants to wait more to assess developments in prices and financial markets after the August decline.

Wednesday

The Reserve Bank of New Zealand is expected to cut the OCR rate by 50 basis points to 4.75%. The reason for these expectations comes from the fact that the unemployment rate is at its highest level in 3 years, the core inflation rate is within the target range and high-frequency data continues to show weakness. Furthermore, Governor Orr said in the recent press conference that they took into account a set of moves in the latest policy decision which included a 50 basis point cut.

Thursday

US CPI YoY is expected to come in at 2.3% vs. 2.5% previously, while M/M is expected at 0.1% vs. 0.2% previously. Core CPI Y/Y is expected at 3.2% vs. 3.2% previously, while Monthly is expected at 0.2% vs. 0.3% previously.

The latest US labor market report was much better than expected, and market expectations of a 50 basis point cut in November quickly evaporated. The market is now finally aligning with the Fed’s expectation of 50 basis points of monetary policy easing by the end of the year.

The Fed’s Waller said they could move faster on interest rate cuts if labor market data worsens, or if inflation data continues to come in lower than everyone expected. He also added that the new rise in inflation could also lead to the Fed stopping interest rate cuts.

And given the recent NFP report, even if the CPI falls a little, I don’t think they will consider a 50 basis point cut in November anyway. This may be a matter of discussion at the December meeting if inflation data continues to be below expectations.

US unemployment claims remain one of the most important releases to follow each week, as they are a convenient indicator of the state of the labor market.

Initial claims remain within the 200K-260K range established since 2022, while continuing claims after a sustained rise over the summer have improved significantly in recent weeks.

Initial claims this week are expected to stand at 230k vs. 225k previously, while there is no consensus on continuing claims at the time of writing although the previous release showed a decline to 1826k.

Friday

The Canadian labor market report is expected to show 28,000 jobs added in September versus 22.1,000 in August and the unemployment rate rising to 6.7% versus 6.6% previously. The market is anticipating an 83% probability of a 25 basis point cut at the next meeting, but as inflation continues to surprise to the downside, a weak report will likely increase the chances of a 50 basis point cut.

The US PPI on an annual basis is expected to come in at 1.6% vs. 1.7% previously, while last month’s index is expected to come in at 0.1% vs. 0.2% previously. The YoY core PPI is expected to come in at 2.7% vs. 2.4% previously, while the monthly reading is expected at 0.2% vs. 0.3% previously.

Again, the data is unlikely to prompt the Fed to discuss a 50 basis point cut at its November meeting even if it fails to do so. The risk now is that inflation will get stuck at a higher level or even surprise to the upside.