Asian equity market moves are mixed this morning. The biggest gains are in Chinese indices, while economic uncertainty weighs on other markets. In its latest statement on monetary policy, the Australian central bank revised down its economic growth, inflation and labour market forecasts and repeated that any future interest rate hikes will be data dependent. Opinion polls in the US suggest that the Republicans are on course to win back control of the lower chamber House in next week’s Congressional elections but that the Senate is a close call.
The US labour market report is likely to be the closest watched report of the day. It is always seen as a key bellwether of US economic conditions. However, Wednesday’s Federal Reserve monetary policy update, which was perceived as more ‘hawkish’ than expected, has probably increased the importance of this report and subsequent updates. The Fed remains more concerned about inflationary pressures than downside economic growth risks. That increases the focus on indicators of domestic inflation conditions such as the labour market update.
Recent monthly updates have suggested that the US labour market remains buoyant and seemingly very tight. Employment growth is still solid, while the unemployment rate is at a multi-year low. As a result, concerns persist about upward pressure on wage growth. Recent data suggest that wage growth has stabilised, but the Fed sees it as still uncomfortably high. We expect today’s report for October to show slower employment growth than in September but still too high to reassure the Fed. Meanwhile, in another signal of potential inflationary pressures, the unemployment rate is forecast to hold at its recent low of 3.5%.
In the UK, October construction PMI data will provide a timely update on a sector that has historically been particularly interest rate sensitive. The September heading reading surprised on the upside rebounding to its highest level in three months but there are doubts whether that more optimistic picture can persist.
A briefing from Bank of England Chief Economist Pill will provide some further details on yesterday’s monetary policy update. Meanwhile, Boston Fed President Collins will be the first Fed policymaker to speak post Wednesday’s update.
US Treasury yields continued to rise yesterday as markets took onboard the implications of this week’s US monetary policy update. They have now retraced most of the late October fall in yields as markets anticipated an early ‘pivot’ in Fed monetary policy. UK gilt yields also rose yesterday However, their rise was much more modest in response to what was perceived as a relatively ‘dovish’ monetary policy update by the Bank of England, despite its 75 basis point interest rate hike. In currency markets, the US dollar rose sharply against both the euro and sterling on the back of higher US rate expectations.
