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Market To Watch Federal Reserve (FED) Members For Clues On Next Steps As The Single Currency Remains Fragile

US Labour Data Disappoints Again

The focus of the market last week was the US jobless data. This is always a keenly watched number, but this month had a greater emphasis on the figure following comments from the FOMC at their latest meeting. The headline nonfarm payrolls report saw 194K jobs added in September, much less than the consensus forecast of 500K, and lower than the 366K reported in August which also undershot in a big way. The headline implications are that the Fed could push back on cutting tapering next month and the by-product could potentially push back on investor expectations for a Fed rate hike later in 2022. If the Fed does continue to push on with its tapering plans, the question will now be at what pace following two disappointing jobs reports.

Looking to the week ahead the market will keep a close eye on other economic metrics for clues on the economy whilst comments from central bankers, following the disappointing jobs numbers, will be deciphered. With oil prices near a 7-year high, there will be a keen eye on the inflation numbers due on Wednesday and Thursday. Consumer spending will also be under the microscope with the retail sales on Friday.

UK Strengthen Expectations Of December Hike  

Last week was a mixed week for Sterling with pollical gamesmanship being central during the Conservative party conference. Concerns for stagflation remain elevated which hinder the currency as oil prices approached a 7-year high. New Bank of England (BoE) Chief Economist Pill that the current spike in U.K. inflation looks set to last longer than originally thought. On Friday this increased the probability of a rate hike in December to 46% from only 8% last month. However, the lack of Sterling upward movement following this rebalancing of risk highlights the concern with stagflation amidst the well-published supply chain issues. In terms of economic data, it was generally positive as the PMI services data was revised higher and house prices continue to rise.

Over the weekend, comments from BoE officials reinforce signals of an imminent rise in U.K. interest rates to curb inflation. Governor Andrew Bailey warned of a potentially “very damaging” period of inflation unless policymakers take action.” In the meantime, comments from BoE official Saunders suggested the market are right to bring forward bets on rate hikes. Further comments from BoE officials will be closely monitored.

This week’s data releases will be closely watched for clues on potential policy action whilst trying to articulate whether the economy can handle a hike. The UK’s labour data is set for release on Tuesday which could continue to paint a confusing picture. Despite the reported shortages, the unemployment rate is expected to fall to a new 13-month low of 4.4% and that the level of vacancies in the economy will remain at or close to a record high (of over 1 million). However, the figure may be ignored as the furlough was still active. The monthly GDP data for August is released on Wednesday. The reading is expected to show the economy continuing to grow albeit at a weaker rate than in H1.

The Eurozone Single Currency Remains Fragile On Subdued Policy Outlook

The single currency was backfoot last week as the market continued to speculate that both the UK and US could raise interest rates sooner than expected, with the Eurozone holding tight throughout the whole of 2022. This was further compounded with comments from the central bank that express they continue to believe that inflation is transitory. In terms of economic data, the final Eurozone PMI services index reading was revised marginally higher, but both the Italian and Spanish readings were below market expectations for the month. The weaker than expected readings in these countries reinforced concerns that the surge in energy prices will undermine activity, especially in southern Europe where the increase in costs has been most extreme

Looking to the week ahead the market will mainly focus on the German and European ZEW figures. The ZEW survey is based on institutional investor and analyst views on the current state and 6-month outlook of the economy so can be used as a leading indicator of economic activity and future confidence in it. Both the EU and German ZEW readings are set for release on Tuesday.

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