The Week Ahead: Fed, BoE rate decisions; US non-farm payrolls
A busy week of economic announcements lies ahead. The US Federal Reserve and the Bank of England are set to maintain the pace of their recent interest rate rises, then on Friday we’ll get the US jobs report for October. Meanwhile, BP and Rolls-Royce are among the big names due to report their latest results.
OUR TOP THREE EVENTS FOR 31 OCTOBER – 4 NOVEMBER:
Wednesday – US Federal Reserve interest rate decision
The Federal Reserve is expected to raise interest rates by 75 basis points (bps) for the fourth consecutive meeting. In September Fed chair Jay Powell said that the Federal Open Market Committee (FOMC) was “strongly committed” to driving inflation lower, signalling further rate rises, and added that there was no painless way to drive inflation lower.
Core inflation is forecast to ease to 4.5% this year, before falling to 2.1% by 2025. We could see rates rise by at least 100 bps and perhaps by as much as 150 bps before the end of this year. The latter would lift the federal funds rate to a target range of 4.5% to 4.75%.
The central bank has also downgraded its GDP growth target for this year to 0.2%, with Powell admitting that a recession might be possible.
At the end of last month there was talk that some Fed officials were becoming uneasy about the pace of the current hiking cycle. That’s understandable, but apart from Fed vice chair Lael Brainard few Fed officials have spoken out. Even hawkish policymakers like Minneapolis Fed President Neel Kashkari have remained tight-lipped on the need for a pause or a pivot. Kashkari commented in October that the Fed would be in no position to ease the pace of rate rises if inflation was still rising.
That said, cracks may be starting to emerge in the wall of consensus. San Francisco Fed President Mary Daly has hinted that after November there could be discussions about slowing the pace of rate hikes. Powell’s post-meeting press conference is therefore likely to be crucial as observers monitor whether he comes across as hawkish as he did in September.
Thursday – Bank of England interest rate decision
A weakened pound after weeks of political turmoil has had a negative impact on UK inflation. The pound’s fall against the dollar has raised import costs, while the markets’ rejection of ex-prime minister Liz Truss’ economic plan sent bond yields soaring, contributing to higher mortgage rates. The instability led ratings agencies such as Moody’s and Fitch to downgrade the UK’s economic outlook and credit rating.
Now that some sense of calm has been restored, the big question is whether the Bank of England raises interest rates by 50 or 75 bps. With fiscal policy now set to be a lot tighter, the scope for the Bank of England to be more aggressive on monetary policy is limited due to concerns about the impact on demand. It seems a little bit late to worry about that now. The new Rishi Sunak-led government’s decision to reverse many of Truss’ proposed tax cuts could mean that any recession is likely to be prolonged, piling further pressure on the pound. All things considered, it seems more likely than not that the Bank of England will opt for a third successive rise of 50 bps.
The Bank also has to deliver its latest economic forecasts for inflation and GDP. Let’s hope they are more accurate than they have been so far this year.
Friday – US non-farm payrolls (October)
The US labour market has held up well despite concerns over slowing consumer spending and increased costs for businesses. Job losses, as reported in the latest round of corporate earnings updates, may soon work their way into the unemployment figures. But that hasn’t happened yet, with new jobless claims still at a very low 230,000 a week.
The September payrolls data were decent. The US economy added 263,000 jobs last month, slightly above economists’ estimates of 250,000, but fewer than the 315,000 jobs created in August. Meanwhile, the unemployment rate fell to 3.5%, mainly because of a drop in the labour force participation rate, which fell to 62.3% from 62.4%. The participation rate remains a puzzle. Despite the rising cost of living, the rate is still 1% below pre-pandemic levels. The September jobs report also showed that wages grew 5% year-on-year, the lowest increase this year.
For October, economists expect non-farm payroll growth to ease to 200,000 jobs, which would be the lowest number this year. The unemployment rate is forecast to tick back up to 3.6%.
Overall, last week saw a strong ‘risk on’ theme across asset classes and there’s a strong case for a continuation of that theme this week with the key driver being a pivot to a looser monetary policy stance from the Fed. Despite continued rate hikes expected this week, markets are forward looking and any forward guidance which suggest a slowing or end of the hiking cycle will result in aggressive ‘risk on’ positioning.
