It is All About the Fed Today!

The US markets dropped their early momentum and ended the session lower after the most recent job openings data. ISM manufacturing survey revealed that the US economy maintained its decent form amid fears over an economic slowdown. In contrast, European markets started the month on a bullish note and appeared ready to maintain that trend this morning.

The October ADP employment report is anticipated to show 178k new jobs added, a reasonable slowdown from September’s 208k. The Federal Reserve is ready to release its latest rate decision after European markets close. This could further indicate a sturdy labour market, which we could see later today with the ADP employment report.

Ahead of that, we have the most current updates to the recent flash PMIs from Germany, France, Italy, and Spain. It is anticipated that all these countries will slip back further into the zone associated with contraction, with values of 45.7, 47.4, 46.9, and 47.6, respectively.

Following three earlier comparable increases in June, July, and September, the Federal Reserve is not anticipated to spring a surprise on the market today when it is expected to raise the Fed Funds rate by another 75 basis points, bringing it up to 4%.

In the past few days, the primary focus of attention has switched to what might be coming in December. This is because markets are progressively pricing in the possibility of a policy pivot, pause, or slowdown as we approach the final quarter of the year.

It isn’t easy to see how Powell can draw a line between today’s press conference and the meeting in December, when there will be two CPI reports and two jobs reports between now and then. The midterm elections are coming up in a few days, so it is tough to see how Powell will be able to establish a boundary between today’s press conference and the meeting in December. Suppose the Fed is correct in stating that the data determine it. In that case, it will need to maintain the possibility of a rate increase of 75 basis points (bps) on the table if he is serious about what he said in September, which was that the FOMC were “strongly committed” to bringing down inflation.

While we have seen other central banks, such as the RBA and the Bank of Canada, lessen the speed of their hawkish monetary policy cycles, this is primarily due to worry over their housing markets. However, Powell’s conviction was that there was no simple method to push inflation lower, and the statement is still accurate now as it was then.

The Federal Reserve’s shift in tone in September was also strikingly different. At that time, the Fed announced a reduction in its annual GDP objective to 0.2% in 2022, and Chairman Jerome Powell acknowledged the possibility of a recession.

This year, core inflation is expected to fall to 4.5%, which is projected to drop to 2.1% by 2025. so basically, the Fed still have a long way to go to bring inflation reading back to its original target. The task is still as tricky as it was a few months ago because inflation is still very much anchored in place. We could see another 150 basis points by the end of the year, which would put the Fed Funds rate at 4.75 per cent by the end of the year.