Key Events and Data to Watch This Week

Tuesday, 14th October

• 14:00 - UK Average Earnings Excluding Bonus (Aug)

• 14:00 - UK Employment Change (Aug)

• 17:00 - Eurozone Industrial Production (Aug)

Wednesday, 15th October

• 14:00 - UK Consumer Price Index (Sep)

• 14:00 - UK Producer Price Index (Sep)

Thursday, 16th October

• 08:30 - Australia Unemployment Rate (Sep)

• 17:00 - Eurozone Harmonized Index of Consumer Prices (Sep)

• 20:15 - ECB Interest Rate Decision

• 20:30 - US Retail Sales (Sep)

• 21:15 - US Industrial Production (Sep)

Friday, 17th October

• 07:30 - Japan National Consumer Price Index (Sep)

• 10:00 - China Gross Domestic Product (Q3)

• 10:00 - China Industrial Production (Sep)

• 10:00 - China Retail Sales (Sep)

• 14:00 - UK Retail Sales (Sep)

Mixed Economic Signals Widen Fed Hawk-Dove Divide on Future Rate Cuts

Last week's mixed inflation and employment data have tempered bets on how much the Federal Reserve will ease for the remainder of the year. Markets are now focusing on Fed officials' comments and upcoming data for further clues. 

On Thursday, data revealed that consumer prices in the U.S. rose more than expected in September. While headline inflation continued to ease, core prices—driven by sticky service prices—increased for the first time in over a year. 

Following the data, remarks from several Fed officials suggested that the surprising September CPI figures have not shaken their confidence in the broader downward trend in inflation. However, remarks from certain officials suggested that inflation risks are reemerging as a concern for the Fed, which had primarily shifted its focus to the labor market in recent months. 

Raphael Bostic, President of the Atlanta Fed, suggested that it might be appropriate to skip a meeting this year, depending on the data. Chicago Federal Reserve Bank President Austan Goolsbee expressed confidence that inflation is progressing toward the target rate, while also warning that strong demand could rekindle inflation risks, requiring vigilance.

Additionally, Dallas Federal Reserve Bank President Lorie Logan described the economy as "strong and stable" during an event on Friday, but highlighted that significant inflationary risks still remain. 

When assessing the statements from various Fed officials, the key takeaway is that the Fed seems poised to continue its gradual approach to policy easing. However, divergent views are emerging regarding the path ahead for the remaining two meetings of the year. Mixed signals from U.S. economic data appear to widen the gap between the Fed's dovish and hawkish members. 

Meanwhile, the University of Michigan's survey revealed that U.S. households have become more optimistic about the job market; however, disappointment over high living costs has offset this optimism, leading to an unexpected drop in consumer sentiment for the first time in three months.  

The share of U.S. consumers expecting unemployment to rise next year fell to a 10-month low of 31%. Despite this, inflation remains the top concern for consumers, with inflation expectations for the next year rising to 2.9%, up from 2.7% in the September survey. 

In summary, U.S. consumer surveys and labor market data indicate a decline in perceived risks to the job market, but concerns about inflation are again gaining traction. This dynamic reinforces expectations that the Fed may deliver only one more quarter-point rate cut this year. Futures market data shows that participants are pricing in a roughly 20% chance that rates will be held steady at either the November or December meetings. While this positioning offers some tailwind for the U.S. dollar and Treasury yields, the Fed’s path toward easing is capping aggressive gains in these assets.

Fed Policy Debates and Global Tensions Drive Gold’s Safe-Haven Demand

As debates about the Fed's policy path continue, gold started the new week with a gain of over 0.3%, trading around $2,665 per ounce.  

Data from the U.S. shows that while risk perceptions regarding the labor market have decreased, inflation risks remain elevated due to strong job growth, resilient wage increases, and robust consumer demand. The concern that rate cuts could fuel inflation is tempering expectations for Fed rate cuts. 

As bets on rate cuts from the Fed decrease, U.S. Treasury yields continue to hover near three-month highs. The 2-year yield stands at 3.94%, while the 10-year yield is at 4.07%, the highest since late July. 

Typically, higher yields are negative for gold, which offers no yield. However, the ongoing policy easing by major global central banks, persistent geopolitical tensions, and political uncertainty due to the upcoming U.S. elections continue to support safe-haven demand, acting as a tailwind for gold. 

China’s Finance Briefing Disappoints, Deflation Concerns Persist

On Saturday, markets left the highly anticipated briefing by China’s Ministry of Finance without getting exactly what they were hoping for. Finance Minister Lan Foan hinted that the government would expand borrowing to address the real estate sector crisis and support heavily indebted local governments more. However, the briefing lacked concrete spending plans for fiscal stimulus. Additionally, the absence of any measure to boost consumption further contributed to the market's disappointment. 

Key takeaways from the Ministry of Finance's briefing

Increased Borrowing: The central government will borrow more to help local governments address off-balance-sheet debt.

• Housing Market Support: Local governments will allocate funds from special bonds to purchase unsold homes.

• Fiscal Expansion Capacity: The central government retains significant room to increase borrowing and expand the budget deficit.

• Bank Capital Support: Major state-owned banks will receive assistance in replenishing their capital.

• Available Funds: China has 2.3 trillion yuan in special local bond funds remaining for the year.

Some economists pointed out that reducing local debt risks, filling state banks’ capital gaps, and extending support to the real estate sector were exactly what the market expected. However, many other economists expressed concern that the announced stimulus measures were not backed by real money, that there was no plan to stimulate consumption, and that there were no subsidies for households—factors they believe make these measures insufficient to combat deflation. 

Meanwhile, data released on Sunday showed that consumer prices in September rose less than expected, highlighting weak demand. Besides, factory gate prices fell for the 24th consecutive month. 

China’s consumer price index (CPI) in September remained flat from the previous month, showing no change. Year-on-year, CPI rose by 0.4%, below both the previous and the market consensus expectation of a 0.6% increase. According to the National Bureau of Statistics report, the 0.4% increase was driven by rising fresh vegetable prices. Core consumer prices, which exclude volatile food prices, rose only 0.1%, marking the slowest increase since February 2021. 

Additionally, the producer price index (PPI) fell by 2.8% year-on-year in September, following a 1.8% decline the previous month and surpassing the market expectation of a 2.5% drop. 

China is facing its longest deflationary period since the 1990s, with prices falling for five consecutive quarters. While recent measures by the Chinese government to support economic growth are notable, many economists continue to emphasize the need for steps to boost spending and stimulate consumption, which is the main engine of growth. 

In conclusion, due to the large gap between market expectations and the measures announced in the latest briefing, global sentiment towards China’s economy has not recovered. This may continue to weigh on Asian currencies, create headwinds in the oil market, and support demand for safe-haven assets.