Economic data holds steady as U.S. election and Fed meeting loom

U.K. monetary policy

As bond yields have been rising in the U.S., this has also influenced the U.K. bond market with yields rising. However, since the Autumn Budget announcement on October 30, domestic forces have fueled the increase in bond yields and shifted monetary policy expectations. Since mid-September, the 10-year gilt has risen by 75 bps, reflecting an expectation that the Chancellor's fiscal stance will lead the Bank of England (BoE) to ease monetary policy less than the market expected. In the near term, the anticipated two 25-basis-point rate cuts for November and December are now reduced to only one in November, with only a 30% chance of a cut in December. Over the past month, the three-year swap rate has increased by 50 bps, with 30 bps coming after the Budget announcement. This unexpected change left borrowers somewhat caught off guard, as many expected ongoing rate cuts to be “in the bag.” The market remains highly sensitive to short-term data releases, and with CPI forecasts at risk of upside revision, there is no guarantee that a potential fall in interest rates will play out as expected.

Job openings and GDP estimate

Economic releases began early last week, with the Bureau of Labor Statistics releasing the job openings and labor turnover summary on Tuesday and the Bureau of Economic Analysis publishing third-quarter GDP estimates on Wednesday. Both items reported just lower than expected, pointing towards a slight deceleration in the economy.

The job openings and labor turnover reports data on three sections of the labor market: job openings, hires, and separations. Job openings posted at 7.44M in September, 0.42M lower than August’s release of 7.86M. Hires changed little from August to September, increasing by 0.13M to 5.6M. Separations, inclusive of quits and layoffs, were unchanged at 5.2M. While little changed month-to-month in September’s report, the yearly amounts posted indicated an easing of the labor market, bolstering expectations of further quantitative easing measures from the Federal Reserve.

Third-quarter GDP estimates reported a 2.80% increase last Wednesday, down 0.30% from expectations and 0.20% from the second quarter’s reading of 3.00%. The deceleration of GDP reflected in the third quarter estimates incorporate a decrease in both private inventory investment as well as residential fixed investment. The GDPNow, an estimate of GDP published by the Atlanta Federal Reserve Bank, forecasted a 2.30% increase in GDP for the fourth quarter last Friday, indicating a slight economic contraction in the last few months of the year.

PCE

Last Thursday, the Bureau of Economic Analysis posted the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s preferred measure of inflation. The Index increased 0.20% from August to September, a slightly larger change than August’s report of 0.10%. However, the yearly change in PCE was posted at 2.10% in September, down from a 2.20% annual change in August. Core PCE — excluding food and energy — increased 0.30% over the month and 3.70% over the year. Energy appears to be a large driver in the difference between PCE and core PCE over the year, reporting an annual decrease of 8.10%. September’s data reflects the lowest PCE Price Index since February of 2021 and is close to the Federal Reserve’s target inflation rate of 2.00%.

Unemployment and nonfarm payrolls

Last Friday’s unemployment report posted nonfarm payrolls at 12,000, down from last month’s 254,000 and missing expectations of 110,000. This marks the lowest change in payrolls since December 2020. Federal Open Market Committee (FOMC) member Christopher Waller anticipated this downward result in a speech on October 14, predicting that the report “will most likely show a significant but temporary loss of jobs from the two recent hurricanes and the strike at Boeing.” The Bureau of Labor Statistics echoed this in their report, highlighting a decline in manufacturing of 46,000 in October and attributing this decline to strike activity.

The unemployment rate matched both the forecasted rate as well as September’s rate of 4.10%, hovering just around the 4.00% target of maximum employment. In response to Friday’s unemployment and nonfarm payrolls report, slightly more of the market began to price in a rate cut at this Thursday’s FOMC meeting. The CME FedWatch Tool reported a 94.50% probability of a rate cut Friday morning after the report was published, up from a 90.10% probability from the day prior. The stock market ended up slightly on Friday, with the S&P 500 reporting an increase of 0.40%, and the two- and 10-year Treasury rates increasing by four basis points and 10 basis points, respectively.

The week ahead

This week marks another busy week with economic data releases — including factory orders, the U.S. trade deficit on Tuesday, and consumer sentiment on Friday. Prepare for market responses to both the U.S. election on Tuesday and the FOMC meeting on Wednesday.