Asian equity markets are lower this morning showing caution ahead of some key US data. US Federal Reserve policymaker Williams reaffirmed the guidance made by other Fed officials that interest rates will need to go higher to control inflationary pressures. Meanwhile, European Central Bank President Lagarde emphasised the need to anchor inflation expectations. EU officials have expressed optimism that a deal will soon be reached with the UK on the Northern Ireland aspects of the Brexit agreement.
The key economic release of the day for markets will be the monthly US labour market report. Always seen as a bellwether of US conditions, it is currently even more important as the Federal Reserve tries to work out whether inflationary pressures are easing. Recent US inflation data suggests that upward pressures on prices from international developments are easing. However, the Fed is also concerned about domestic pressures, not least the impact of tight labour market on wages.
The October report showed a solid rise in employment, a small move up in the unemployment rate – to a still very low 3.7% – and signs that, while wage growth has levelled off, it remains uncomfortably high compared with the 2% inflation target. We expect a similar outcome for November indicating no significant easing in pressures. That would seem consistent with the Fed’s policy guidance that the pace of interest rate hikes will now slow but rates still have further to rise.
Today’s Canadian labour market report will also be interesting particularly as the Bank of Canada will give its latest monetary policy update next week. As is the case with the US, the BoC has to balance signs that international inflationary pressures have eased against ongoing concerns about a tight labour market. Today’s report is expected to show wage growth still above the level that would be consistent with the BoC’s inflation target, while the labour market is only expected to show very tentative signs of easing up. Forecasters are divided Economists are divided on whether the BoC will again raise rates by 50 basis points next week or opt for a smaller rise of 25bp.
Richmond Federal Reserve President Barkin and Chicago Fed President Evans are scheduled to speak today but they are unlikely to provide any clues on the US interest rate outlook. Neither of them vote on interest rate changes this year but previous comments suggest that they will be supportive of another rate hike.
Bond yields in both the UK and the US continued to move lower yesterday as data in the US supported hopes that inflationary pressures may be easing. In currency markets, the US dollar slipped further against both the euro and sterling as hopes of an early peak in US interest rates continued to rise.
