Major Events of Last Week
The surprisingly release of hawkish statements by the US Federal Reserve last week was one of the primary influences driving the directional movements of the financial markets. Although the US Central Bank kept its benchmark interest rates unchanged, it clearly identified December as a potential lift-off date for monetary tightening. However, despite the growing prospects of increased US borrowing costs, global equities still managed to record their best monthly performances during October in practically four years. They were primarily invigorated by the European Central Bank (ECB) and the Bank of Japan (BoJ) seriously contemplating the need for additional stimulus measures in order to boost their flagging national economies. The primary US indices slumped last Friday exemplified by the Dow Jones Industrial Average sliding nearly 42 points lower; the S&P500 falling by almost 5 points and the NASDAQ dropping by just over 13 points.
Expectations subsequently dimmed towards the end of last week that the Fed will, indeed, hike interest rates in December for the first time in almost 10 years after the USA posted a spate of economic data which missed analysts’ expectations. For instance, US economic growth slumped during the third quarter of 2015 to 1.5% compared to its predicted value of 1.6%. In addition, US Consumer Spending rose at its slowest pace in nearly eight months during September while Personal Income merely trend water.
After studying these results, some prominent economists advised that the confirmed weaker-than-expected inflationary pressures could now convince the Fed to delay its monetary tightening aspirations until 2016. They were particularly concerned by Consumer Spending easing upwards by only 0.1% last month after surging 0.4% higher in August. They argued that this lackluster performance indicates a significant slowdown in US economic activity.
Another worrisome aspect was that the Personal Consumption Index (PCE) just succeeded in nudging higher by 0.2% in September to record its weakest increase since April. This parameter is especially relevant as it is one on the primary factors utilized by the Fed when determining monetary policies. The PCE has now risen by 1.3% during the last twelve months which is well below the Fed’s inflation target of 2%.
Despite all this Fed conjecture, investor sentiment was continuously bolstered during October by other global central banks supporting the imminent need for fresh stimulus actions. This category includes the ECB, BoJ, Reserve Bank of Australia (RBA) and Reserve Bank of New Zealand (RBNZ).
What to Expect This Week
On Monday, China will present its Purchasing Managers’ Manufacturing Index (PMI) for October. Investors are hoping that this key inflationary data will confirm a recovery from the seven-year low recorded in September. The United Kingdom will next disclose its own PMI (Manufacturing) for last month which should extend six consecutive months of growth. The USA will then continue the trend by revealing its PMI (Manufacturing) for October. Economists are hoping that this indicator can register a larger growth value than its previous reading in order to confirm that the US economic recovery is still gaining traction.
New Zealand is scheduled to deliver its labor report for the third quarter of 2015 on Tuesday. The NZD/USD could come under extensive pressure if the unemployment rate edges higher for the third straight month in a row.
Australia will launch Wednesday by posting its Retail Sales for last month. Analysts are hoping that this parameter can at least match the encouraging 0.4% growth value recorded in September. Later, Great Britain will issue its PMI (Services) for October which is predicted to rebound from a multi-month low of 53.3. If not, then expect Sterling to face stiff pressure. The USA will then publish its ADP Employment Report for October. Expert consensus is anticipating that US private companies created between 180,000 and 230,000 new jobs during this period. The USA will then terminate the session by declaring its PMI (Non-Manufacturing) for last month. Investors will scrutinize this result very carefully in order to glean any important insights into the release of the all-prevailing Non-Farm Payrolls (NFP) on Friday.
On Thursday, the Bank of England (BoE) will announce its latest Monetary Policy Statement and Quarterly inflation report, which will be supported by a subsequent Press Conference. If the BoE adopts a hawkish stance by verbally supporting a rate hike during 2016, then expect Sterling to rally. The Reserve Bank of Australia will next proclaim its own Monetary Easing Policy. Economists are predicting that this statement will present a dour tone as a direct result of recent Chinese economic woes and declining commodity prices.
The pivotal event of the week will then occur on Friday when the USA discloses its vitally important labor report for last month. The NFP needs to surge back above 180,000 in order for the Fed to garner enough confidence to instigate an interest rate in December.