Last week, inflation in the US increased at the forecasted rate but the bigger news was Fed Chair Jay Powell flagging a slower pace of rate cuts. Meanwhile, economic growth decelerated in the UK and Japan and US indices finished the week on the softer side as traders took profits from the ‘Trump rally’.
Inflation data for the UK and Japan will be in focus in the upcoming week, followed by PMI figures for major economies.
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Biggest Market Movers
- Crude declined over 3% to around $67 due to oversupply concerns after OPEC countries reduced the demand growth forecast for the current and next years.
- The Euro performed poorly against several currencies as investors expected the ECB to reduce interest rates further to mitigate the potential trade war with the US, falling to 1.05 against the dollar.
- The dollar index spiked over 2% to a 13-month high after the Fed Chair stated there was no immediate need for interest rate cuts, with the USDJPY breaking through the 156 mark.
- Bitcoin topped $90,000 on Wednesday but could not sustain those gains as dealers noted profit-taking in the latter half of the week.
The Week in Review
US inflation accelerated as expected in October, with the headline rising to 2.6% while the core rate remained unchanged at 3.3%. However, the PPI figures the following day garnered market attention as prices rose at a faster rate than expected, undermining the disinflationary narrative.
Fed Chair Jerome Powell delivered a Thursday speech emphasising solid economic performance in the US and acknowledging that inflation would continue on a "bumpy path." He admitted that the inflation data released hours earlier was a "bigger bump" than expected and signalled a slower path to cutting rates.
The UK economy expanded at a slower pace than expected in Q3, with a preliminary reading of 0.1% compared to the expected 0.2%, hampered by unexpectedly sluggish exports. Employment figures also disappointed, with the unemployment rate unexpectedly rising to 4.3% from 4% previously. Monthly GDP for September turned negative at -0.1% instead of the expected +0.2% growth.
Chinese industrial production also disappointed, but retail sales outperformed; however, markets seemed focused on the continued decline in home prices as the central government continues to gradually introduce new China stimulus measures that have yet to match the initial market enthusiasm.
In geopolitical developments, Asian stocks underperformed as investors assessed the perceived hawkish initial appointments to the Trump cabinet, including Senator Marco Rubio as Secretary of State, the first occupant in that position actively under sanctions by China.
Israeli forces advanced further into Lebanon as press reports speculated that Prime Minister Benjamin Netanyahu was attempting to conclude the war before Trump took office. The Japanese Diet (parliament) called for special sessions later in the month to try to approve a budget as the political impasse continued after Shigeru Ishiba was confirmed as Prime Minister of a minority government.
Top Events in the Week Ahead
Over the next few trading sessions, the primary focus will be on inflation data.
Inflation, Inflation, Inflation
Canada will report its inflation figures first, expecting an increase to 1.9% from 1.6%, albeit within the Bank's target range. However, the core rate is projected to remain steady at 1.6%, likely maintaining BoC's easing bias. Trading at 2020 levels above 140, USDCAD could see further upside towards 1.4170, with support seen at 1.3865.
The UK will follow with its own CPI, with forecasts pointing to a return to the 2% target, while the core is expected to remain at 3.2%. Despite this, BOE Governor Bailey has cautioned about the need for reduced services inflation. Under the 200-week moving average of 1.2833, Cable could slide to 1.25 unless buyers reclaim the 1.29.
Finally, Japanese inflation figures are expected to stay above target. Market participants are almost equally divided on whether the BOJ will raise interest rates at its next meeting. USDJPY faces resistance at 157.50, whereas support below 153.95 sits at the 50-week moving average of 150.70.
Economic Weakness Led by Germany in Europe
Amid potential trade tariffs, attention has shifted to the subdued growth in the European economy. The release of flash PMI figures on Friday, especially for Germany, could garner heightened market interest as they are widely expected to remain firmly in contraction territory. Eurostat is expected to confirm that the inflation rate for October stood at the target of 2%, with the core rate at 2.7%. EURUSD falling below the 1.05 handle might open the door to the 1.0448 low formed in October 2023. Conversely, resistance above 1.0667 lies at 1.0705.
Other Events and Earnings
- The week commences with the release of Japanese machinery orders on Monday.
- On Tuesday, the RBA will publish the minutes from its most recent meeting.
- Wednesday brings Japan's trade balance figures and German PPI data.
- Thursday features the existing home sales report for the US and PMIs.
- Friday concludes the week with the University of Michigan consumer sentiment index for the US.
The unofficial earnings season draws to a close throughout the week, with major corporations such as Walmart, Lowe's, Medtronic, Nvidia, Intuit, Deere, and The Buckle yet to report their financial results.
Source: Spreadex
