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US Fed holds steady

Even though the economy is booming and job growth continues, inflation is slowing, leading the US Federal Reserve to refrain from raising interest rates this week. The Fed’s favored PCE inflation reading for September saw a slight increase, but rates are expected to remain unchanged after the two-day meeting early Thursday morning, Sydney time. There’s no talk of a rate cut either, despite pressure from stressed investors hoping to ease the strain on Wall Street, which is already in a new correction phase.

The Nasdaq entered correction territory last Thursday, followed by the S&P 500 on Friday, and the Dow has declined by approximately 8% over the past three months since its August 1 high. Another challenging week could trigger a market-wide correction.

Friday’s October jobs data will be a crucial test, assessing whether the strength displayed in the past three months can persist. However, the focus remains on the Fed meeting.

Fed Chair Jerome Powell stated late last month that “inflation is still too high,” raising the possibility of a rate hike this year. However, his message was clear: rates won’t be coming down anytime soon. The Fed has already raised interest rates 11 times since last year, and the current federal funds rate of 5.25% to 5.50% is expected to persist because the 10-year bond rate, at 4.84%, has risen 0.26% in the past month—effectively equivalent to one normal increase in the Fed’s key rate.

Last week, the European Central Bank left its rate unchanged, sounding less hawkish, but emphasised maintaining high interest rates for a “sufficiently long duration.” President Lagarde stated that it’s too early to consider cuts. The Bank of Canada also kept its key rate unchanged last week, expressing concern about slow progress toward price stability and increased inflationary risks.

Despite slightly elevated PCE consumer spending and inflation data, there’s no indication of sentiment favoring a looming rate hike in the US, largely due to the Fed’s effective communication with the market. Core PCE increased by 0.3% last month and 3.7% year-over-year, matching economists’ estimates, with the monthly rise surpassing August’s 0.1% increase. US consumer spending also exceeded estimates, increasing by 0.7%, explaining the robust first estimate of US third-quarter GDP growth at 4.9%.

Economists anticipate the October new jobs figure to be around 170,000, nearly half the surprising surge of 316,000 in September, along with an additional 119,000 jobs for August and July. Dr. Shane Oliver, the Chief Economist at AMP, forecasts unchanged US unemployment at 3.8% and slowing wage growth to 4.0% year-over-year in October.

Additional US data includes the Employment Cost Index for the September quarter, expected to be 4.4% year-over-year (Tuesday), consumer confidence and home price growth (also Tuesday), the October ISM activity surveys indicating weak manufacturing conditions (on Wednesday), and a slight dip in services (Friday). Job openings (also on Wednesday) are likely to continue their downward trend.

Furthermore, ongoing Middle East conflicts and fluctuating oil prices are expected to keep markets on edge due to Israeli attacks on Gaza.

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