Key points to watch out for:
- A decisive week is expected with the U.S. employment report, advanced GDP, and PCE inflation
- The Bank of Japan is anticipated to leave interest rates unchanged; will it consider a hike later in the year?
- Eurozone GDP and CPI data are also on the agenda
- Australian quarterly CPI and the U.K. budget round out the week
All Eyes on U.S. Data as the Fed Turns Hawkish
In September, the Federal Reserve’s unexpected decision to cut rates by about 50 basis points appears to linger in the market’s memory, as policymakers have now taken a more hawkish stance.
U.S. economic indicators since the September meeting have been positive, including the CPI report, and Fed officials have signaled that another 50 basis point cut is unlikely in the near term. The shift from a “hard landing” to a “soft landing” or even a “no landing” has reversed Treasury yields, creating upward momentum for the U.S. dollar.
With the Fed’s November policy decision approaching, this week’s data will offer an ideal update on the U.S. economy and inflation strength.
Defying Slowdown: U.S. Growth Holds Strong
On Tuesday, October 29, the October consumer confidence index and September JOLTS job openings will be released, followed by the first estimate of third-quarter GDP on Wednesday, October 30.
The U.S. economy is expected to have grown at an annualized rate of 3.0% in Q3, matching Q2’s pace. Not only is this above-average growth, but the Atlanta Fed’s GDPNow model estimates it even higher at 3.4%, suggesting an upside surprise is more likely than a downside one.
Wednesday will also bring the ADP private employment report, offering an early view of the labor market, along with pending home sales.
PCE Inflation in Focus Following Mixed CPI Report
Both CPI and PCE data have shown a divergence between headline and core figures. The core PCE price index, which the Fed prioritizes in decision-making, rose to 2.7% y/y in August, while headline PCE dropped to 2.2%. September figures may remain unchanged or decline slightly. As such, the inflation data may not provide definitive guidance for the Fed or investors.
However, the same day’s income and personal consumption figures could offer additional insights for policymakers, while October’s Challenger layoffs and quarterly employment cost will also be closely watched.
NFP Report May Be Decisive
On Friday, November 1, the week’s most crucial data release arrives: the October nonfarm payrolls. After a solid 254,000 jobs increase in September, the U.S. labor market is expected to add 140,000 new jobs in October, signaling a slowdown. However, the unemployment rate is expected to stay at 4.1%, while average hourly earnings may slightly dip from 0.4% to 0.3% month-over-month.
The ISM manufacturing PMI, also due, is expected to improve from 47.2 to 47.6 in October. With the Fed now more focused on the labor market than inflation, weak payroll data could again set a more cautious tone.
Can the Dollar Continue Its Recovery?
Any signs of a cooling U.S. economy could boost market bets on additional rate cuts in the coming meetings. However, if growth remains solid and PCE inflation shows stability, rate cut expectations may face another setback.
At present, only a further 25 basis point reduction is expected this year. If a November rate cut becomes a possibility, the U.S. dollar could reach new highs, although Wall Street stocks would likely come under pressure.
Nonetheless, if earnings from Microsoft, Apple, and Amazon.com do not disappoint, an earnings-heavy week could help sustain positive momentum.
Bank of Japan Expected to Maintain Policy Stance
October 24 marked a turning point in the Bank of Japan’s stance, as it abandoned its yield curve control policy, halved its bond purchases, and raised borrowing costs, ending its negative interest rate policy.
Despite policymakers’ intentions to normalize monetary policy further, inflation appears to be stabilizing around the BOJ’s 2.0% target, reducing the urgency for additional tightening. Comments from Governor Ueda and other board members suggest a rate hike is unlikely on Thursday, October 31, when the BOJ issues its October decision.
However, the updated outlook report, with projections for inflation and growth, may hint at a rate hike in late 2024 or early 2025.
Without signs of an imminent rate hike, the yen will likely continue to struggle against the U.S. dollar. Meanwhile, Japan’s September preliminary industrial production and retail sales figures are also set for release on Thursday, October 31.
EUR Awaits GDP and CPI Data
The euro’s recent drop below $1.08 reflects a double-top pattern against the dollar, a bearish indicator for technical analysts. This week’s data releases are unlikely to offer much support.
The preliminary GDP estimate on Wednesday, October 30, is expected to show the Eurozone economy grew by just 0.2% quarter-over-quarter in Q3. On Thursday, October 31, CPI data was in focus, with expectations that headline inflation rose from 1.7% to 1.9% y/y in October. However, the ECB has already indicated that inflation is likely to rebound in the coming months.
Better-than-expected data could offer the euro some short-term relief after four consecutive weeks of losses. If the figures miss expectations, however, investors may increase their bets on a 50 basis point ECB cut in December.
Pound Faces Pressure Ahead of U.K. Budget
The pound has been under pressure, falling below $1.30, despite the Bank of England’s hawkish stance. Further declines may occur on Wednesday, October 30, when U.K. Chancellor Rachel Reeves unveils the first budget of the new Labour government.
U.K. media reports suggest that Reeves may announce tax hikes totaling around £40 billion, potentially raising the tax burden to its highest level since 1948. While this is unwelcome news for taxpayers, the BOE may appreciate it, as tighter fiscal policy could ease inflationary pressures, supporting a quicker rate cut.
A deficit-reducing budget may put additional pressure on the pound. Even if growth-stimulating policies are introduced, they are likely to be long-term measures and will not deter a BOE rate cut. However, the pound could find some support if investors recognize the U.K. government’s focus on long-term investments and deficit control rather than short-term voter incentives.
Conclusion
Traders will also focus on Australian CPI data on Wednesday, October 30, as the Reserve Bank of Australia holds a neutral stance on rates. After a modest rebound at the start of the year, Australian inflation started moving in the right direction over the summer. The monthly rate fell to 2.6% y/y in August, within the RBA’s 2-3% target range for the first time since 2021.
Quarterly data, seen as more reliable, will likely be key in discussions at the RBA’s November 5 meeting. Despite positive progress in inflation, especially in the trimmed and weighted averages, the RBA is likely to remain cautious for now, possibly initiating rate cut discussions in the future.
However, for the Australian dollar, a hawkish RBA may offer only limited support if overall market risk sentiment remains fragile and the U.S. dollar stays strong. Australian traders will also monitor the Chinese PMI for October, which will be released on both Thursday, October 31, and Friday, November 1.
