Key events in developed markets

Three interest rate cuts and an easing of US-China trade tensions have calmed fears about a potential US recession, but we think the financial market reaction may be excessive. The yield curve has re-steepened and equities are at all-time highs yet the manufacturing sector is contracting and there are signs of slowdown elsewhere. With politics likely to remain a source of uncertainty, we believe the Federal Reserve has more work to do to ensure a slowdown doesn’t become more severe.

Nonetheless, the narrative from Fed officials this week is likely to remain that they have a preference to pause at the December FOMC meeting in order to take stock of the impact of their actions so far. Data wise, we will be looking at how the small business sector is feeling – the NFIB index is currently at its lowest level since Donald Trump became President – and whether there is any let-up in the pain for the manufacturing sector. We doubt it. With the ISM production component at its weakest level for 10 years, the risks are skewed towards a weaker number. Retail sales will also be published and are likely to show another soft reading given weak auto sales numbers. Finally, inflation data should be little changed. As such, we have a US economy that is decelerating with a benign inflation backdrop. The Fed has the scope to loosen policy further and we think they will in early 2020.

The Bank of England caught markets slightly off-guard this month when two policymakers voted for an immediate 25 basis point rate cut. While we still think policy easing is unlikely to materialise in the short-term, it’s pretty clear that a lot hinges on the jobs market – especially given that the growth figures are so volatile at the moment. So while we’re likely to see a solid 0.4% rebound in growth next week, another sharp fall in the level of employment will emphasise that the jobs market is no longer tightening. Hiring indicators point to deteriorating demand for staff amid Brexit and global uncertainty.

Despite a deteriorating growth backdrop, the Riksbank looks determined to exit negative rates in December. Next week's two key data releases - unemployment and inflation - are unlikely to change that. Policymakers have dismissed recent jobs data given recent quality issues (it's not clear whether this will get cleared up next week). The Swedish stats agency found that the unemployment rate has been slightly overestimated over the past six months, and underestimated before that, resulting in a flatter path. Inflation-wise, don't expect any large surprise, with CPIF broadly around the Riksbank's forecast.