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The Fed has launched its monetary policy normalisation campaign with a bang in September, cutting its key rate by 50bp from its highest level since 2001. Jerome Powell made clear that this large initial step was driven by the need to prevent a deterioration of the labor market now that inflationary pressures have abated. In that respect, all data related to the dynamic of the US job market will be closely scrutinised again this month as they will likely influence the size of the next rate cuts by the Fed. The monthly Employment Report (4/10) will be the most important data in that field, as a pronounced slowdown in the pace of job creations or an increase in the unemployment rate would likely lead investors to expect a fastened pace of rate cuts at the coming Fed’s meeting. Weekly initial jobless claims and job opening data (29/10) will also provide insightful updates, even if they might be distorted by ongoing strikes in US ports and at Boeing, or the impact of Hurricane Helene.
All inflation gauges are trending toward the 2% target, and the Employment Cost Index should have slowed down in Q3.
Inflation dynamics have now become less of a concern for the Fed, but CPI inflation (10/10) and PCE inflation (31/10) for September will also be important for confirming that the balance of risk has shifted from inflation to growth in the US. The Employment Cost Index for Q3 (31/10) will provide an update on wage dynamics, with most leading indicators pointing to a continuation of the slowdown that has contributed to making the Fed confident about the inflation outlook. The Minutes of the Fed’s last monetary policy committee (9/10) should provide more insight on the reasons behind the September’s 50bp rate cut, and maybe help to better assess the reaction function of the Fed for the coming months. In the current context, it is likely that the evolution of retail sales (17/10) will also be an important data point to gauge the resilience of household spending, as the labor market is cooling off and consumer sentiment has been hovering at a moderate level.
With lower rates and easier financing conditions, stronger demand for mortgages and housing should increase and support US growth.
The first estimate of GDP growth for the third quarter (30/10), while backward looking, should also be important in reassuring on the resilience of the US economy. If growth proves to have been resilient over the summer, it will reinforce the likelihood of the soft-landing scenario. The easing in financial conditions anticipated by markets since mid-summer will likely support economic activity in Q4 and beyond. As an illustration, the average mortgage rate has sharply declined in the recent months, even if it remains elevated from an historical point of view. This decline has triggered a pickup in demand for mortgage refinancing and home purchases. Real estate market data will be monitored in October to see whether the easing in financing conditions also materialises in higher housing starts and building permits (18/10), increasing existing home sales (23/10) and improved homebuilder sentiment (NAHB index 17/10).
Economic growth had already started to slowdown since the beginning of the summer, and the recent data has confirmed this negative trend. Activity in Germany remains depressed and continues to decline, to the point where GDP is now expected to stagnate at best for the entire year 2024. In France, the “Olympic” effect that had supported activity in August has quickly faded away, and the two largest economies of the Eurozone are currently experiencing economic contraction. This is partly offset by better dynamics in Italy and in Spain, where the service sector activity remains buoyant. Overall, growth momentum is weak for the monetary union and keeps undershooting expectations.
Economic activity is weakening again in the Eurozone, dragged down by Germany.
