Markets are very sensitive and concerned about what the US central bank is signaling and what it will do, says SEB’s chief strategist, Erica Dalstow.
She is eagerly awaiting more things from the US next week. First come the minutes of the Federal Reserve’s latest interest rate meeting, ahead of the release of inflation figures on Thursday.
The latter is likely to provide strong leadership on what the central bank will do at the next interest rate meeting.
– Core inflation will be important factor When it comes to factors considered about how much and for how long the Fed will raise interest rates, and how long it takes to cut, Dalstow says.
Core inflation is expected to rise to 6.5 percent, with higher rental prices and wage growth among drivers.
So inflation statistics come from the US in the week following the labor market numbers before the weekend, Numbers often referred to as the “most important month”Last month, the US labor market showed somewhat better than expected.
It was not good news for the Federal Reserve. Therefore, financial markets will be paying close attention to the inflation figures due out on Thursday. Growth in overall inflation is expected to slow. If it doesn’t, it will raise interest rate expectations, says chief economist Sarah Midgaard at Handelsbanken.
The numbers caused a broad and sharp decline on Wall Street, as all three major indexes fell more than 2%.
The biggest drop was the tech-heavy Nasdaq, which ended the week down 3.8 percent. On the other hand, Oslo Poor’s ended positively and continued to turn around from the sharp decline at the end of September.
Norway’s inflation figures will also be very important. Here, we expect inflationary pressure to continue and, like the Norges Bank, we expect core inflation to be five per cent. Midtgaard says massive inflationary surprises are needed to get the Norges Bank to change its short-term interest rate plan.
In Norway, inflation figures for September will be released on Monday morning. In August, price growth was 6.5 percent year on year, while core inflation, that is, price growth excluding tax and energy changes, was 4.7 percent.
Labor market numbers distinguish the market
Friday’s numbers showed that 263,000 new non-farm jobs were created in the US in September, slightly more than expected. At the same time, the unemployment rate fell surprisingly from 3.7 percent to 3.5 percent, despite the strong interest rate policy pursued by the US central bank to calm the economy.
With labor market numbers in mind, this week’s inflation numbers from the US are therefore what the market will now follow, as well as the interest rate meeting minutes, Midtgaard believes. If the inflation numbers are weaker than expected, that’s good news for the Fed, though not that the central bank will continue to run aggressively.
Total inflation fluctuates significantly with commodity prices. Especially now that oil prices have been raised OPEC + plan to cut two million barrels per day, it will be important to look at the underlying price increase in order to see if the inflation problems appear to be regressing. In other words, core inflation, says Midgard.
How will the market react if inflation numbers are weaker than expected?
It will not stop the Fed raising 75 basis points. But I imagine interest rates will fall somewhat immediately, while stock markets will rise somewhat, she says.
Olaf Chen, Head of Global Personalization and Interests at Storebrand, like Midtgaard, highlights this week’s inflation numbers. He believes that weak inflation numbers may lead to two interest rate hikes in December.
The US labor market numbers are close to the lowest we’ve seen since the 1950s, and in that sense Thursday’s inflation numbers are very significant. If the inflation numbers are weak, the Fed could raise the interest rate by 50 basis points in December, instead of 75. That will be enough for the market to breathe a sigh of relief, says Chen.
– Don’t buy soft landing
In the past year, the market’s sensitivity to interest rate movements has been near the extreme. Chen thinks the labor market numbers that sent Wall Street straight down on Friday are another example of this. At the same time, he believes that the strong numbers show that the United States is still in a recession.
There are many pessimists who say the US is already in a recession, but the numbers from Friday don’t agree with that. The big question now is how the central bank will reduce inflation without increasing unemployment.
Because unlike the pessimists who believe that the market is already in recession, the US central bank expects a soft landing for the US market. At the same time, the Fed believes unemployment should rise from 3.5 percent to 4.1 percent, which Chen believes would be synonymous with recession.
– Historically, if unemployment first increased by 0.5 percentage points, the increase in unemployment did not stop there. It is also the reason why the market is not convinced of the possibility of a “soft landing”.
You will not be able to reach the 2 percent inflation target without weakening the economy, but at the same time you will not be able to maintain maximum employment if you dampen the economy.
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