Key events in developed markets next week

Financial markets are currently favouring the Federal Reserve implementing a fourth consecutive 75bp rate hike on 2 November and we agree. Inflation is sticky while the near-term growth story is looking OK and the economy continues to add jobs in significant numbers. That message should be reinforced by the upcoming labour report with unemployment staying at just 3.7%, payrolls increasing by around 200,000 and wage growth staying elevated. There are also plenty of Federal Reserve officials scheduled to speak and so far there is little sign of any inclination to slow the pace of policy tightening. The ISM business activity report should remain firmly in growth territory as well with the trade balance making further improvements. As such, we are expecting 3Q GDP to come in at close to 2%.

UK markets remain volatile, and sensitive to further headlines over the coming week. We remain sceptical that the Bank of England will hike rates before its scheduled November meeting, despite a lot of tightening priced into swaps markets. Instead, we’ll be watching for any update on the Bank’s bond strategy. The BoE was forced to start buying long-dated gilts amid concerns about the stability of UK pension funds, but this is for a limited period and the Bank has said it plans to plough on with gilt sales from the end of the month. We think that’s likely to get pushed back, however, given the strains in the gilt market. Markets will also remain hyper-sensitive to any headlines related to the government’s controversial growth plan. In the first instance, press reports suggest the focus will be on spending cuts to offset some of the planned tax cuts, though this could be both practically and politically challenging. The Office for Budget Responsibility is due to provide a first draft of its post-Budget forecasts to the Chancellor privately on Friday.

In Canada, the jobs market has wobbled of late with employment falling for three consecutive months after some very vigorous increases earlier in the year. We are hopeful of stabilisation in Friday’s September report given the economy is still performing relatively well, but if we are wrong and we get a fourth consecutive fall then expectations for Bank of Canada tightening could be scaled back somewhat – especially after some softer than anticipated CPI prints. We are currently forecasting a 50bp rate hike at the October BoC policy meeting with a final 25bp hike in December.

For the eurozone, it’s a pretty light week in terms of data. Retail sales on Thursday catch the eye as we’ll get more information on consumer spending in the eurozone, as purchasing power remains under severe pressure. We’ve seen a declining trend in spending since last November and have little indication that August data will have shown a big turnaround. Continued declines would fuel our view that the eurozone economy could have already tipped into contraction in the third quarter.