U.S. Data Signals Strength, But Election Sentiment Sways Markets
As U.S. economic data continues to emerge, election-related predictions are increasingly influencing market dynamics. Following data indicating that the U.S. economy continues to grow robustly, the labor market remains strong, and inflation shows persistence, markets are set to closely monitor today’s critical non-farm payroll figures before clarifying expectations regarding the Federal Reserve’s policy path.
On Wednesday, the ADP Research Institute's private-sector employment change report surprised markets, showing payroll growth far exceeding all economist estimates in a Bloomberg survey, reaching 233,000. This marks the fastest job increase in over a year.
The ADP report suggests robust labor demand despite disruptions in business activities caused by hurricanes and worker strikes. However, economists at Goldman Sachs emphasize that ADP data has historically been less sensitive to events like natural disasters or strikes compared to the government’s nonfarm payroll report. Thus, today's payroll growth figures could offer a clearer view of the labor market.
A separate report released on Wednesday showed the U.S. economy grew by 2.8% in the third quarter, marking six consecutive quarters of growth above 2.5%—the longest such period since 2006. The growth momentum has been largely driven by consumer spending, which rose by 3.7%, the highest increase since early 2023, underscoring the steady momentum in domestic demand.
However, the rise in consumer spending is somewhat slowing the progress of inflation toward the target rate. The report released on Thursday showed that the Fed's preferred inflation measure, the Personal Consumption Expenditures (PCE) Price Index, recorded its largest monthly increase since April in September. Excluding volatile food and energy prices, the core PCE index rose by 0.3% month-over-month and 2.7% year-over-year, slightly above the market expectation of 2.6%.
Inflation-adjusted consumer spending rose by 0.5%, supported by an additional 0.1% increase in real income, up from 0.3% the previous month. This data underscores the continued strength in consumer spending, with service expenditures rising by 0.2% month-over-month, while goods spending increased by 0.7%, indicating a more resilient outlook.
Meanwhile, Thursday's weekly labor market data showed unexpected resilience, as initial jobless claims fell by 12,000 to 216,000, the lowest level since May. Continuing claims also dropped by 26,000 to 1.86 million.
The data released this week has strengthened the belief that the Fed is managing to control inflation without causing a recession. Such an outlook justifies the Fed continuing with rate cuts in the upcoming quarters. However, the stickiness in inflation supports expectations that rate cuts will proceed at a slower pace.
There is a consensus for a quarter-point cut at next week’s meeting; however, views are growing that cuts may pause in January, with a shift to a quarter-point pace per quarter thereafter. The final data point expected to shape expectations for the Fed ahead of the U.S. elections will be today’s Nonfarm Payrolls figures.
Turning to the election landscape, recent data has become a positive catalyst for Kamala Harris, who has faced strong economic criticism from Republican candidate Donald Trump. With the election just days away, polls show a tight race between the two candidates. However, in the prediction market, bets on Trump's victory have somewhat diminished.
In prediction markets like PredictIt, Polymarket, and Kalshi, where people can place bets on election outcomes, bets between Trump and Harris remained quite close from early August to October. However, since the beginning of October, bets have shifted significantly in favor of Trump, with his victory being assigned a probability of 60% or higher.
Nevertheless, these bets have decreased since Wednesday, while bets on Harris’s victory have increased. Trump’s odds have now dropped to around 55%, and the weakening of the “Trump trade” is putting some pressure on the strength of the U.S. dollar.
Gold Drops Amid Fed Rate Expectations But Finds Support from Safe-Haven Demand
After data from the U.S. fueled expectations that the Fed would slow the pace of rate cuts, gold saw its largest daily drop since July. Despite a rally in U.S. Treasury yields, GOLD had continued to post consecutive record highs due to election uncertainty and geopolitical risk premium. Following a nearly 2% drop after Thursday’s U.S. inflation data release, it has regained some of its losses today.
As growing bets on a Trump victory, U.S. Treasury yields have increased by approximately 60 basis points since the start of the month. Typically, rising yields are negative for non-interest-bearing assets like gold. However, election-driven uncertainty has bolstered safe-haven demand, disrupting the traditional correlation, and pushing gold up about 5.5% this month to a record high of $2,790 per ounce.
With only days left until the U.S. election, markets are closely watching today’s nonfarm payroll data to clarify expectations regarding the Fed’s pace of policy easing. A decrease in payroll numbers, as economists forecast, would support upward momentum in precious metals, while payroll growth exceeding expectations could increase pressure on them.
Oil Prices Spike Amid Reports of Potential Iran-Israel Conflict
Oil prices surged over 2% early in the day, jumping above $70 per barrel after a report suggested that Iran is preparing to attack Israel from Iraqi territory in the coming days.
Oil prices had previously plunged sharply following expectations that tensions in the region might ease, as Israel’s response to Iran was not as forceful as anticipated. Israel was considering a U.S.-led proposal to end the conflict in Lebanon; however, it stated that it would respond very harshly if Iran were to attack again.
Meanwhile, a report published by Axios heightened concerns that tensions in the region could escalate again, leading to an increase in the geopolitical risk premium in oil prices. However, market observers argue that neither Israel nor Iran would risk a regional war. Therefore, considering concerns over global demand, the possibility of renewed pressure on the upward momentum in oil should not be overlooked.
Eurozone Growth and Inflation Surprise Markets, Shifting ECB Rate Cut Expectations
The recent data from the Eurozone previously indicated that inflation had fallen below the European Central Bank's target rate and that the economic downturn in the region had deepened. This situation had increased expectations for the ECB to implement another half-point cut at its December meeting, following three previous quarter-point cuts this year, putting pressure on the euro.
However, data released this week showed that the region's economy grew above expectations and inflation had accelerated. A report published by Eurostat on Wednesday revealed that third-quarter growth was 0.4% compared to the previous quarter, exceeding the market expectation of 0.2%. Year-over-year growth was 0.9%, up from the previous 0.6%.
Thursday’s report showed that general inflation had risen from the previous 1.7% to reach the ECB’s target rate of 2%. Excluding food and energy, price increases remained steady at 2.7%.
The figures have reversed expectations of an aggressive rate cut, with markets now pricing in a quarter-point cut in December. Meanwhile, policymakers continue to signal caution.
ECB President Christine Lagarde emphasized in a Thursday statement that inflation is progressing toward the target but that the struggle is not yet over. Lagarde noted that inflation could continue to rise in the coming months due to base effects.
Meanwhile, differing views from policymakers continue to emerge. his week, ECB Executive Board member Isabel Schnabel and Bundesbank President Joachim Nagel advocated a gradual approach, emphasizing that rate cuts should not be rushed. Meanwhile, Governing Council member Fabio Panetta argued that rate cuts should continue to prevent inflation from falling below the target rate.
In conclusion, the ECB appears set to continue a data-dependent policy. Expectations that rate cuts will slow have eased some pressure on the common currency, the euro, though signals to the contrary could weaken it further.