Weekly economic and financial commentary: Faster rate cuts from the ECB likely

Wells Fargo Research Team Wells Fargo

Summary

United States: Jobs up, rate cut expectations down

Nonfarm payrolls blew past expectations in September, rising 254K. Upward revisions to the prior two months' data sweetened the headline gain and bucked the trend decline in hiring, while the unemployment rate unexpectedly ticked down a tenth to 4.1%. The solid jobs report tamped down expectations for another 50 bps rate cut at the FOMC's next meeting in November.

Next week: NFIB Small Business Optimism Index (Tue.), CPI (Thu.), Consumer Sentiment (Fri.)

International: Faster rate cuts from the ECB likely

In the Eurozone, the September CPI report showed further progress on disinflation for the region’s economy. The combination of slower inflation and more downside risks to GDP growth has compelled us to update our forecast to include a faster pace of ECB rate cuts through early 2025.

Next week: Japan Labor Cash Earnings (Tue.), Mexico CPI (Wed.), U.K. Monthly GDP (Fri.)

Interest rate watch: The outlook for longer-term interest rates

The FOMC cut the federal funds rate by 50 bps on Sept. 18, and other short-term interest rates promptly moved lower. However, longer-term yields generally have risen modestly since the FOMC reduced the federal funds rate a couple of weeks ago. For instance, the 10-year Treasury yield has climbed from 3.65% on September 17 to 3.95% today.

Credit market insights: On the road again; Student loan on-ramp comes to an end

As of the start of October, student loan borrowers who are late or miss payments can face credit reporting penalties, as the Biden administration’s year-long student loan “on-ramp” ended this month. For a portion of the over 40 million federal student loan borrowers, the end of the grace period means an additional financial hurdle for those who have missed payments.

Topic of the week: Middle East escalations capture attention

A further escalation of miliary conflict in the Middle East captured headlines for most of this week. As the conflict intensified, market participants were reminded that the ongoing conflict in the region does not yet have an end in sight one year on from the start of the war.

Download the full Weekly Economic and Financial Commentary

Author

Wells Fargo Research Team

Wells Fargo

AUD/USD hits nine-week lows below 0.7000 on RBA Bullock's remarks

AUD/USD reverses a brief uptick and turns lower to hit nine-week lows below 0.7000 in the European morning on Tuesday, as traders digest cautious remarks from Reserve Bank of Australia (RBA) Governor Michele Bullock during the press conference. Earlier on, the RBA raised the cash rate to 4.60%, as widely expected, leaving the door open to further rate hikes if needed.

USD/JPY consolidates near 157.50 as a bullish USD counters intervention risks

USD/JPY struggles to capitalize on the overnight bounce from a one-week low, consolidating around 157.50 in the Asian session on Tuesday. Trump's concerns about the Japanese Yen's weakness fueled speculation about another US-Japan joint intervention. This, along with the hawkish BoJ, underpins the JPY and caps the currency pair. Meanwhile, rising Fed rate-hike bets and oil-driven inflation fears continue to push US bond yields to multi-year highs, keeping the US Dollar pinned near a two-month high and supporting the pair.

Gold: Bulls seem hesitant as Fed hike bets, higher bond yields, and bullish USD cap upside

Gold clings to modest recovery gains through the first half of the European session, albeit it lacks follow-through and remains below $4,150. Moreover, the bearish fundamental backdrop keeps the precious metal within striking distance of the lowest level since August 4, around the $4,100 neighborhood touched on Monday, and warrants caution before positioning for any meaningful appreciation.

Chainlink trims gains after CCIP 2.0 launch, Swift ledger integration

Chainlink (LINK) edges below $15.00 on Tuesday, trimming its 10% gains from the previous day, driven by the launch of its new Cross-Chain Interoperability Protocol 2.0 and Swift ledger integration for tokenized deposits and 24/7 cross-border payments.

Focus turns to US job openings

In the euro area, focus turns to the September flash inflation print for Spain which will give the first indication of where the euro area data on Friday lands. We expect a modest rise in headline due to higher energy costs and a small increase in core inflation. We also receive the European Commission's business survey for September.

Fed vs BoJ: Both hiked. The market only believes one of them – and the chart shows which

The Fed and the BoJ have just done something remarkably similar. Both central banks raised interest rates by 25 bps last week, both are confronting inflation risks, and both signal that future decisions will depend on incoming economic data.