Week ahead: US government reopening brings September data

Markets welcome what could be a pivotal week, as they grapple with the aftermath of the prolonged US government shutdown. The week's highlights will include the delayed September US jobs report on Thursday, UK inflation numbers, and S&P Global PMI data.

So, the day finally arrived. After shutting its doors at the beginning of October and keeping things bolted down for a record 43 days, the US government reopened and, with it, should follow outstanding economic data. As I am sure you can imagine, despite private-sector data, the absence of official economic figures has left the Fed – and market participants, for that matter – in the dark.

September US jobs report eyed

The September jobs report will be released this week; the data was collected before the shutdown, but not processed. Therefore, this should be reasonably straightforward to publish. This follows both ISM and ADP prints that echo a soft jobs market, with this week’s payrolls data forecasting 50,000 new jobs (up from 22,000 in August), and the unemployment rate expected to remain unchanged at 4.3% (per LSEG calendar below).

The October employment release, on the other hand, will be trickier. The payroll number should be reasonably straightforward, as it is derived from the Establishment survey. However, the unemployment rate will unlikely be included in the report, as this forms part of the Household survey, which requires calling households, which has not been done.

Should we see a meaningfully soft jobs print this week, one that sees payrolls drop into negative territory, could prompt USD downside and increase rate-cut bets – potentially extending USD weakness to the 50-day SMA at 98.57 on the USD index.

You may recall that we recently saw a notable hawkish repricing in Fed rate expectations amid neutral-to-hawkish Fed commentary, with investors now assigning only a 40% chance of a rate cut (down from 70% a week ago). However, the USD declined, and Gold was bid, which is not the typical price action you would expect having seen a rather large repricing, suggesting more complex forces are at play beyond simple monetary policy arithmetic.

We will also get the Fed minutes from the previous meeting. However, I do not see much value in this release, as it predates the end of the shutdown.

UK inflation eyed

The UK's October inflation numbers (Wednesday at 7:00 am GMT) will be interesting this week.

The UK has been in the spotlight for longer than I can remember now. Let’s be frank, the economic picture is bleak. Growth is stagnating, with recent September and Q3 GDP numbers coming in lower than expected and showing barely any growth. This reinforced market expectations of further BoE easing and weighed on the GBP. On top of this, inflation, albeit coming in softer than expected for September, remains nearly double the BoE’s inflation target, and the jobs market is cooling.

You may recall that the MPC voted 5-4 in favour of holding the bank rate unchanged at 4.0% earlier this month, which was more dovish than the 6-3 vote expected. Within the 9-member Committee, we now have two clear camps: hawkish and dovish supporters, as I see it, with BoE Governor Andrew Bailey veering on the side of the doves.

Following the BoE’s decision, I noted the following:

‘Bailey now holds the decisive vote. Although he chose to keep rates steady, the BoE Governor recognised that upside risks to inflation have become less pressing since August, siding somewhat with the dovish members. Bailey also said he thinks additional policy easing is likely if disinflation becomes more clearly established in the period ahead.

Between now and the next meeting on 18 December, we will see two more inflation reports, with the second due a day before the meeting. These reports will be crucial to watch. Attention now shifts to the UK Autumn Budget on 26 November,with growing speculation that tax rises are on the menu’.

Heading into this week’s CPI data, as per the LSEG calendar below, YY headline and core CPI inflation measures are forecast to ease to 3.6% (from 3.8%) and 3.4% (from 3.5%). However, in light of money markets already pricing in around 20 bps worth of cuts for next month’s meeting, a sizeable miss would be needed to increase rate-cut bets. All it would probably do is see the market full price in a reduction next month.

What about a surprise upside in inflation? While a print that exceeded prior data will likely move the GBP higher it is likely to be short-lived, given the economic situation in the UK and the Autumn Statement is scheduled for 26 November. The Labour government has dropped plans to raise income taxes, causing Gilt yields to rise and the GBP to fall.

Additional data on deck this week:

The October Canadian CPI inflation data will be out today at 1:00 pm GMT.

The November flash PMI releases for the eurozone, the UK, and the US will be released on Friday at 9:00 am, 9:30 am, and 2:45 pm, respectively.