US Payrolls watched for signs of further labour market tightening

• US payrolls to set tone for interest rates expectations
• No policy changes expected for BoE or ECB policy meetings
• UK data watched for indications that economic growth is slowing

The past week has seen contrasting monetary policy messages from the US and Japan. Although the US Fed brought QE to a close and did not change its forward guidance on interest rates, there was a hardening of the language about the tightening of the labour market. This, along with a seeming downplaying of disinflation risks, sent a message that despite recent financial market gyrations, the Fed is on course to begin to raise interest rates next year. Meanwhile, the BoJ reacted to disappointing economic growth and inflation data by ramping up its own QE programme. This sent USD/JPY falling sharply below 111, its lowest level since 2008.

It is a busy week ahead with lots of key economic data, particularly in the US, along with central bank meetings in the UK and euro area. In the US, October non-farm payrolls (Fri) will as usual be seen as the key release of the month. The Fed’s growing concern over labour market tightness potentially makes it even more important. We expect another solid report with a 230K rise in payrolls and the unemployment rate holding steady at 5.9%. Meanwhile, earnings are expected to tick up modestly, to 2.1% y/y.

Other key US data include the October manufacturing (Mon) and non-manufacturing ISM surveys (Wed). Both are expected to fall modestly compared with September, but only to levels that are consistent with continued above-trend economic growth in Q4. September construction spending (Mon) and international trade (Fri) will be watched for any signs of potential revisions to GDP. There are also several Fed speakers. Minneapolis Fed President Kocherlakota comments will be particularly, interesting as he dissented at the latest FOMC meeting, as will those of Dallas Fed President Fisher because he voted with the majority after dissenting in September. However, Fed Chair Yellen’s address on Friday will be most keenly awaited. Judging by its title this speech could make some important points about monetary policy.

Neither of the coming week’s major central bank meetings are expected to result in a policy change. The ‘flash’ October inflation estimate for the euro area rose modestly to 0.4% from 0.3% in September, although the ‘core’ rate moved down. Inflation is clearly still well below target but the ECB seems unlikely to announce further measures for now. Instead, we expect ECB President Draghi tol emphasise that they are monitoring the impact of previously announced measures. Amongst the coming week’s data German industrial production for September (Fri) will be of particular interest following the large fall In August. We expect a sizeable 2.3% rebound, led by car production. This may help to alleviate some of the concern that German growth is faltering.

In the UK, the MPC (Thurs) is not expected to make any change to policy. With various MPC members having indicated that they have become more dovish in the wake of recent news, there is likely to be speculation over whether the two hawks will move back to voting with the majority. With only the usual minimal statement expected, there will be no immediate confirmation of this. Instead investors will look to the following week’s Inflation Report to provide clarification of the extent to which the consensus view is evolving. We will have to wait until the minutes are published on the 19th to see whether the voting pattern has changed. The coming week’s data will also provide further information on current economic trends. Following the weakening in our own Business Barometer for October, there will be considerable interest in whether the manufacturing (Mon) and Services (Wed) PMIs also soften. If, as we expect, September industrial production (Thurs) softens, it will raise the risk of a downward revision to Q3 GDP.