October 7, 2022 8:01:38

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Asian equity markets are down this morning after declines in US and European markets yesterday. Reports suggest that continued hawkish comments from US Federal Reserve officials have raised concerns that global interest rates may stay higher for longer than previously expected. Meanwhile, the oil price remains close to a four-week high reflecting concerns that OPEC may cut back production.

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THE DAY AHEAD

The US labour market report will as usual be seen as a key bellwether of economic conditions. Some analysts described last month’s outturns for August as an ideal balance, with payrolls growth slower than in July but still strong and wage growth showing tentative signs of cooling, while the unemployment rate unexpectedly rose to 3.7% from 3.5% driven by higher labour participation. 

For September, indicators point to another good month for jobs growth – we have pencilled in a rise of 280k for nonfarm payrolls – while the unemployment rate may tick back down to 3.6%. Average earnings growth will be closely watched too after rising by 0.3%m/m last month, the least since April – we forecast a rise of 0.4%m/m in September.

The Fed clearly still regards the labour market as too tight. The concern that this will fuel domestic inflationary pressures is a key reason why they are signalling the likelihood of another sizeable rise in interest rates at their next policy update on 2nd November. Even a below par report is unlikely to stop them from raising rates. However, markets are unsure whether they will opt for a third successive rate hike of 75 basis points or go for a slightly smaller rise of 50bp. 

A report close to expectations will probably be seen as raising the odds of a 75bp rise, while a below par one will fuel bets on a smaller hike. It would also boost expectations that US rates may be a close to a peak even though recent comments from Fed officials have provided no support for that view. Fed policymaker Williams will speak later in the day, but remarks made earlier this week suggested that he expects policy to remain tight for some time yet.

Elsewhere the Canadian labour market report will be an important input into the Bank of Canada’s policy deliberations ahead of its 26th October policy update. Currently, markets are expecting a 50bp hike.

Bank of England policymaker Ramsden will speak today but his remarks will probably not focus on near-term monetary policy. The most immediate decision for the BoE will be what to do after next Friday when its near-term support for the gilt market is set to end. The Office for Budget Responsibility is set to give a Chancellor Kwateng a preliminary economic forecast today, but this will probably not be published.

MARKETS

Bond yields including the UK’s rose yesterday, while sterling fell particularly against a strong dollar. Today’s US labour market report may set the tone in global markets.