This week has been calm regarding the U.S. economic calendar, yet market pricing remains volatile. With less than two weeks until the U.S. presidential elections, uncertainty weighs heavily on the markets. Shifting expectations regarding the Federal Reserve’s policy path have also influenced global markets. 

U.S. election polls suggest a tight race, and determining the winner may take some time. The flight to quality surged when uncertainty stemming from the elections combined with geopolitical risks. The U.S. dollar has strengthened, and contrary to traditional correlations, precious metals have risen to record levels, while other currencies and the stock market have come under pressure.

On the other hand, recent data points to stronger-than-expected U.S. economic growth and inflation. Based on the September jobs report, sectoral activity indexes, retail sales, and other data, the Atlanta Fed’s GDPNow model estimates that the U.S. economy grew by 3.4% in the third quarter. 

The current economic outlook suggests inflation is controlled without triggering a recession. However, the acceleration of economic growth raises doubts about a soft landing. Combined with concerns over rising fiscal deficits and prolonged inflation following the presidential elections, this increases the likelihood of a "no landing" scenario for the U.S. economy. 

The possibility of a resurgence in inflation in the U.S. has fueled expectations that the Fed may slow the rate cuts, with some discussions even suggesting a pause in rate reductions at certain meetings. This has led U.S. Treasury yields to climb to their highest levels in three months while the dollar strengthens. 

However, the Beige Book survey released earlier in the day, focusing on the Fed's regional business contacts, indicated that economic activity in most parts of the U.S. has stagnated since early September. The report noted modest growth in two of the twelve regions, while economic activity in other areas showed little change. 

More than half of the regions reported 'slight or modest' growth in employment, while prices in most regions rose at a 'mild or modest' pace. Reports on consumer spending were mixed. Some regions indicated a shift towards cheaper alternatives in purchases.  

This supports previous reports claiming that while household consumption remains high in the U.S., it is primarily driven by high-income households benefiting from the wealth effect created by rising asset prices. In contrast, lower-income households are adjusting their spending patterns due to higher prices, opting for more affordable alternatives. Additionally, rising debt accumulation and the risk of default pose a threat to constrain spending within these income groups further. 

As a result, the report presents a softer picture of the U.S. economy, despite the recent upside surprises in the data. This outlook may ease concerns that the Fed will be forced to pause its rate cuts. However, markets will likely wait for the uncertainty surrounding the U.S. elections to clear before adjusting their expectations. The Beige Book contains approximately 15 references to this uncertainty causing consumer or business delays in investment, hiring, and purchasing decisions. 

Markets Eye U.S. PMI Data: Will Economic Resilience Continue?

Later in the day, markets will closely watch the preliminary readings of the October Purchasing Managers' Index (PMI), one of the most important data points of the week. S&P Global's PMI surveys effectively gauge trends in economic growth, inflation, and the labor market ahead of official data releases. 

Median forecasts suggest that the U.S. will maintain economic activity growth for the fifth consecutive month. The manufacturing index is expected to show a narrowing contraction, rising from 47.3 to 47.5. In contrast, the services index is projected to decline slightly from 55.2 to 55.0 yet remain in expansion territory. The composite PMI, which includes both sectors and reflects about 90% of the economy, is anticipated to stay close to the 12-month peak it reached in May. 

Since the pandemic-driven spending spree on goods has ended, U.S. household consumption has shifted towards services. This means resilient consumption continues strengthening the domestic economy while contributing little to the demand for foreign goods. 

Eurozone PMI data show that economic activity has unexpectedly contracted since the beginning of the year, while Chinese data indicate that activity has nearly reached a standstill since June. As global growth forecasts are revised downward, the U.S. economy is expected to outperform the rest of the world. 

Consequently, if PMI data exceeds expectations, it could be a tailwind for strong U.S. growth expectations. This may extend the upward trend in Treasury yields and the U.S. dollar, but it could also increase pressure on other currencies and the stock market. Additionally, despite the strengthening dollar, higher expectations for U.S. inflation could create a supportive environment for demand in precious metals.