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Weekly Economic Roundup: Key Events and Insights [11th October 2024]

 

Rising Inflation and Jobless Claims Keep the Fed’s Rate Cut Outlook in Flux 


Yesterday's release of U.S. inflation and employment data presented a mixed picture, failing to clarify the Federal Reserve's future path as markets had hoped.  


Both headline and core consumer prices for September were 0.1 percentage points higher than expected; the headline consumer price index (CPI) rose by 0.2%, while the core CPI increased by 0.3%. 


According to market consensus, the headline CPI for September was expected to slow down to a 2.3% annual increase following a 2.5% rise in the previous month. However, the data revealed that the annual headline inflation showed a 2.4% increase. While this result exceeded expectations, it still marked the smallest annual increase since February 2021. 

 

Moreover, the core CPI, excluding food and energy, was projected to remain unchanged at 3.2%, but after two months of stability, it rose to 3.3%. This increase was the first rise in core inflation since March 2023. 


According to the report published by the U.S. Bureau of Labor Statistics, the shelter index increased by 4.9% annually in September, and the food index rose by 2.3%. These two categories accounted for over 75% of the headline inflation. 


Meanwhile, the energy index decreased by 6.8%, and used cars fell by 5.1%, contributing to the decline in inflation, while transportation services prices surged by 8.5%, driving the overall increase. Besides, service inflation in the U.S. remains sticky, with a 4.7% rise, indicating ongoing pressure. 


The increase in inflation stems from anticipated factors and is not sharp enough to cause the Fed to pause its easing cycle. Therefore, despite the figures exceeding expectations, they did not fuel concerns that the downward trend in inflation could stall. Indeed, several Fed policymakers, speaking after the report's release, emphasized their confidence in the disinflationary trend, downplaying any potential worries. 


Speaking at an event, New York Fed President John Williams noted that monthly data could fluctuate. Still, he emphasized that inflation is moving steadily downward, and he expects this trend to continue. Chicago Fed President Austan Goolsbee and Richmond Fed President Thomas Barkin also emphasized that the overall inflation trend is clearly downward. Their comments indicated that the higher-than-expected September figures did not alarm Fed officials. 


In contrast, Atlanta Fed President Raphael Bostic took a different stance from his colleagues. Bostic noted that in the September projections, he supported only one additional quarter-point cut this year and expressed comfort with skipping a meeting if the data warranted it. 


Bostic's comments, along with several other Fed officials who had commented earlier, support the bets of market participants expecting a rate cut in only one of the Fed's two remaining meetings this year. According to futures market data, a 43-basis point rate cut is being priced in for the remainder of the year. While there is confidence in the market that gradual rate cuts will continue, there is no full consensus that cuts will occur at both of the remaining meetings this year. 


On the other hand, the weekly employment data released at the same time as yesterday's inflation report strengthened the view that the Fed should continue its cuts. Initial jobless claims for the week ending October 4th rose by 33,000 to 258,000, exceeding all estimates in a survey of economists. The median estimate was for 230,000 claims, following 225,000 claims from the previous week. Continuing claims for the week ending September 27th also exceeded the forecast of 1.82 million, reaching 1.86 million. 


The U.S. Department of Labor report revealed that more than half of the increase in claims came from states affected by Hurricanes Helene and Milton. Economists pointed out that many people might not have been able to work due to the hurricanes, while others may not have filed claims yet. Therefore, fluctuations in claims data could persist in the coming weeks. 


It may still be too early to assess the potential impact of the hurricanes on unemployment data. Still, the spike in jobless claims to the highest level since June 2023 and the rise in continuing claims cannot be easily dismissed. Consequently, it does not seem likely that the market's minor expectations for a pause in Fed rate cuts will gain much traction. This could prevent the U.S. dollar from gaining further strength in the upcoming period. 

 


Fed Rate Cut Expectations Drive Gold Prices Amid Geopolitical Tensions 


Bullion gold rose by approximately 1.3% in the previous session and is trading near $2,645 per ounce. This followed reports from the U.S. showing that inflation in September rose more than expected and jobless claims reached their highest level in over a year. 


As discussions continue about the scope of rate cuts expected from the Fed in its two remaining meetings this year, the prevailing market scenario suggests that gradual rate cuts will continue. 


Gold had been under the selling pressure after aggressive rate cut expectations for November were overturned. However, further rate cuts are positive for gold, which does not yield returns. As a result, the easing cycle of global central banks, particularly the Fed, and ongoing geopolitical tensions could continue to provide tailwinds for gold prices. 

 


Middle East Tensions Push Oil Higher Despite Demand Concerns 


As markets await Israel’s response to Iran, oil prices continue to advance toward a second consecutive weekly gain. Israeli Prime Minister Benjamin Netanyahu's security cabinet met on Thursday to discuss how and when to respond to Iran’s missile attack. While no official statement was made, the tense anticipation among oil traders continues. 


Earlier in the week, Israeli Defense Minister Yoav Gallant stated that the planned move would be “deadly, precise, and above all, surprising.” Although U.S. President Joe Biden has advised Israel against striking Iran’s oil facilities, the possibility is not off the table, keeping global markets on edge. 


If tensions in the Middle East escalate into a regional war or if Israel directly attacks Iran's oil facilities, the production capacity of OPEC's third-largest and the region's biggest oil producer could be wiped out. This potential outcome fuels concerns over global supply, driving the upward momentum in oil prices. 


However, uncertainties surrounding demand, particularly from China, limit the upward trend. The Chinese minister's anticipated statements on Saturday will be closely watched due to their potential impact on the oil market. 

 


Global Markets Eye China's Fiscal Moves Amid Economic Uncertainty 


On Tuesday, optimism for China's struggling economy faded after the National Development and Reform Commission, the country's economic planning agency, failed to deliver the expected stimulus during a briefing. Markets eagerly await the Finance Minister’s briefing on Saturday for additional fiscal stimulus. 


According to a Bloomberg survey of 23 economists, the Finance Minister is expected to announce a 2 trillion yuan fiscal stimulus to support the economy and boost confidence. Most participants predict that this funding will be provided through government bonds. 


Data from China has revealed that the world's second-largest economy grew at its weakest pace in five quarters during the second quarter of this year. Since then, additional data has indicated that domestic demand remains weak, consumer and business confidence has declined, and there are strong signals that the economy is heading towards a deflationary spiral. 


According to data provided by the online recruitment platform Zhaopin Ltd. and compiled by Bloomberg, the salaries offered to new hires in China fell by 0.6% in the third quarter. This decline followed 2.2% and 0.5% increases in the first and second quarters. The figures paint a picture of a worsening labor market, deterring Chinese households from spending more and deepening the cycle of price and wage reductions.

 

On the other hand, in recent months, the Chinese government has announced measures to accelerate economic recovery, including interest rate cuts, mortgage support, and liquidity provisions. However, many market observers emphasize the need for fiscal stimulus backed by real funds to boost consumer confidence, stimulate consumption, and resolve the property market crisis. 


Therefore, markets expect the Finance Minister to announce a stimulus package backed by real funds on Saturday. If the expected stimulus is delivered, optimism for the Chinese economy could be revived. This could improve global sentiment, encourage flows into riskier assets, and potentially lead to a rise in Asian currencies. It could also result in some outflows from safe-haven assets and drive up oil prices. 

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