Is the US jobs market still booming?

A streak of strong US economic data has caused investors to scale back their predictions of how far the Federal Reserve will cut interest rates over the coming months. Friday’s monthly jobs figures will offer up the next big clue about the future path of monetary policy.

Economists polled by Reuters expect US employers to have added 125,000 new jobs in October, down sharply from 254,000 a month earlier — a figure that soared past consensus estimates. The unemployment rate is expected to have stayed flat at 4.1 per cent.

Analysts have cautioned that recent major hurricanes and strike action could make it tricky to parse the significance of the upcoming jobs report. Ian Lyngen at BMO Capital Markets wrote this week that “idiosyncratic factors risk muddying the process of interpreting the realised data”.

Still, the numbers will be scrutinised closely, not least because they land just days before Americans go to the polls on November 5 to vote in the presidential election. 

The Fed cut interest rates in September by a jumbo-sized half point to a range of 4.75 per cent to 5 per cent, following persistent signs of easing inflation and a softening labour market. That move marked the central bank’s first cut since the Covid crisis of 2020.

But signs of economic resilience and rising bets of a Donald Trump victory in the election — deemed by many as likely to have inflationary implications — have raised questions over how much further the Fed will loosen monetary policy.

Broadly, markets expect a quarter-point rate cut at each of the Fed’s two remaining decisions this year, but are pricing in an outside chance the central bank stays on hold at one or other of the meetings. Harriet Clarfelt

How will the bond market greet the UK Budget?

The Labour government’s first Budget on Wednesday will provide a crucial test of whether its plans to borrow more to “invest, invest, invest” in the UK economy will prove acceptable to one important stakeholder group: the buyers of its debt.

Even before the party came to power in July, there were positive noises from bondholders that an increase in borrowing from a Labour administration could be accommodated by the market without causing a Liz Truss-style crisis.

The past few weeks, though, have seen anxiety creeping into the market about potential changes to the UK’s fiscal rules that would open up the path to a greater rise in borrowing than had previously been anticipated. That has contributed to a sell-off in gilts, adding to a global move lower in bond prices, that has pushed the yield on the benchmark 10-year bond up from 3.75 per cent in mid-September to just above 4.2 per cent.

This past Thursday, chancellor Rachel Reeves confirmed that the government would begin to use a gauge called “public sector net financial liabilities”, a broader measure of the public balance sheet that includes assets such as student loans. That would give it the space to borrow an additional roughly £50bn, based on previous numbers, and still stay within its debt target, though it does not plan to use all of it.

On Budget day, investors will be focused on two things. One, how much the revised number for borrowing for the financial year to March, currently at £278bn, goes up. And two, what the pronouncement suggests for future years’ borrowing.

Tomasz Wieladek, chief European economist at asset manager T Rowe Price, said the government might need “credible forward guidance about future borrowing or guardrails to future borrowing to avoid an adverse market reaction” on Budget day.

But now that the fiscal rule change has been announced, there is also the potential of a relief rally in gilts if the bond market judges the new chancellor’s broader spending and borrowing plans to be prudent. Ian Smith

Will eurozone inflation rebound?

Investors are gearing up for the latest clues on the path of eurozone interest rates, with October inflation figures for the currency bloc published on Wednesday.

Annual consumer price growth is expected to rebound to 1.9 per cent, after falling to a three-year low of 1.7 per cent in September, according to economists’ forecasts compiled by Reuters.

The European Central Bank has already delivered three quarter percentage point cuts to interest rates this year as inflation returned to its 2 per cent target. A fourth such move is expected in December, but lower than expected inflation data could encourage markets to increase bets on a larger half point move, currently seen as a long shot.

The October figures “will be a key for prospects of a rate cut larger than [0.25 percentage points] at the next meeting”, said analysts at SEB.

They added: “We, and the ECB, were clearly surprised by the broadly-based weakness in September. We now think the September numbers reflected a softer trend in service prices . . . an autumn upturn in core inflation is less likely now.”

The euro has fallen sharply against the dollar in recent weeks, helped by an expectation that the US Federal Reserve will lower interest rates less than previously thought.

Some analysts think the currency could fall further from its current level of about $1.08, even hitting parity with the dollar, if the ECB opts for faster rate cuts.

“A large part of the single currency’s resilience through much of this year has been drawn from the view that the ECB would be cautious in cutting interest rates,” said Rabobank currency strategist Jane Foley. “However, this view is changing.” Rafe Uddin