Opinions

This week’s economic calendar slows a bit following a busy week capped off by the September employment report. Based upon weak NFP of Sep, lower core PCE and Fed vice chair’s guidance last week, we have pushed back our Oct hike to Dec. In US macro data this week, we have Fed minutes, ISM services & trade balance. In UST dated supply, we have $58 BN of 3 year auction on Tuesday, $39 BN of 10 year auction on Wednesday & $22 BN of 30 year auction on Thursday. The highlight of Fed speak last week is dovish comments from two core members of the FOMC. New York Fed President Williams pushed back against an October hike, saying that with the hike in September, "there is no need for urgency." Vice Chair Jefferson also argued that it may "take some time" for the Fed to assess the evolving macroeconomic environment. He does not appear inclined to hike at the October meeting. Middle east conflict continues unabated and we expect a final resolution only after the 3rd Nov US mid-term elections. In RoW events this week, we have Canadian labor data, Euro area sentix, German industrial production & German factors orders. Also French budget proposals last week seem to have ignited a large rally in OATs with the 10yr OAT-Bund spread widening last week to around 140bp. This can easily move to 175 bps if worries on French budget proposals persist.

This week’s economic calendar features another heavy dose of Fed speak as well as several important data releases that will help to shape market participants’ views on the state of the economy. We have August JOLTS on Tuesday, ADP private payrolls on Wednesday & Sep Non farm Payrolls on Friday. We expect Sep NFP to be at 125k with unemployment rate at 4% leading Fed to focus on it's inflation mandate. Core PCE for Aug is due on Wednesday which we expect to come at 0.28% MoM leading to 3.3% YoY against Fed's median forecast of 3.4% for Q4CY26. Markets are currently pricing in 64% chance of a 25-bps rate hike in Oct meeting and total 35 bps of hike by Dec’26. We expect Fed to hike by 25 bps in Oct meeting and then maintaining a hold till Mar’27. On the middle east conflict, we see little possibility of a deal before the mid term US elections on 3rd Nov as Trump might want to wait out one more month and use a final round of bombing threat to get Iran agree to his demands. Iran on the other hand knows that they don’t have any leverage after 3rd Nov so they are trying to do a deal on their terms currently rather than wait after 3rd Nov. We see Brent continuing in the range of 95-108 for short term.

We expect headline payrolls rose 130k in September against current consensus estimates of 90k. We expect the unemployment rate edged down to 4.0%, with risks skewed to the upside. We expect average hourly earnings (AHE) growth slowed to 0.2% m-o-m. Overall, resilient labor market conditions should keep the Fed focused primarily on inflation. We do not have a strong view on US rates at current levels. Bond yields are headed higher for longer and any relief might be short term only. As long as US equities do not break down, bond yields might not soften materially. The stock market’s resilience has been a surprising, and broadly welcomed, subplot in the transition to higher interest rates. Stocks have withstood surging yields before. And as long as S&P is not falling below 7300, US bond yields might not find any significant relief. Macroeconomic data too supports a resilient US economy with Fed hikes doing little adverse impact on equities strength.

This week’s economic calendar features a heavy dose of Fed speak with a sprinkling of data releases that should provide a timely update on the outlook for capex and the overall business sector. In addition, the Treasury will conduct its second long-end buyback in the 20-30y sector since expanding the size. Investors will likely focus on the purchase amount, which Treasury has indicated would be at least $4bn but could be higher, as well as the breadth of offers accepted. In the FOMC meeting last week, FOMC delivered a unanimous hike, in line with our expectations. The 2026 dot moved up to signal another hike and the distribution pointed to broad support for further tightening. We expect another 25bp hike in October policy. In US macro data this week we have S&P PMIs, initial jobless claims & new home sales. In UST dated supply, we have 2yr FRN auction of $28 BN on Tuesday, 2yr UST auction of $69 BN on Tuesday again, $70 BN of 5 yr UST on Wednesday & $44 BN of 7 yr UST on Thursday. In RoW events, we have SNB meeting & the Norges bank meeting, We expect the SNB to leave its policy rate unchanged at 0.00% at its 24 September meeting. We expect Norges Bank to leave its policy rate unchanged at 4.25%, but signal that another rate rise is likely this year.

Last week’s inflation data did not meet the bar for further progress towards target, and as such the Fed is likely to raise rates at their Wednesday meeting. On the FOMC itself, we have updated our Fed forecast and now expect 25bp hikes at the September and December meetings. We had previously expected an indefinite pause. Warsh is also likely to take market expectations into account, with markets pricing roughly a 90% probability of a September hike at the time of writing. In other US macro data we have retail sales, housing starts, initial jobless claims & pending home sales. In dated UST supply next week we have $13 BN of 20 year US bond supply on Tuesday and $19 BN of 10 year TIPS on Thursday. In RoW events, we have BOE policy meeting on Thursday where we expect a status quo & BOJ policy meeting on Friday where we expect a 25 bps hike. Middle east conflict remains precarious and we expect Brent to be in the range of 95-110 in the short end. With the closure of the East West pipeline, 6-7 mbpd of crude supply has gone offline from Thursday.

With the August employment report in the rear-view mirror, this week’s CPI (Friday) and PPI (Thursday) may very well determine whether the Fed hikes at the September 16 FOMC meeting. Amongst US macro data this week, we have CPI, PPI, existing home sales, Univ of Michigan & initial jobless claims. On CPI itself, we estimate headline CPI to be at 0.36% MoM & core CPI to be at 0.22% MoM. Our forecast for CPI and PPI data points to 0.20% m-o-m core PCE inflation in August. We believe another 0.2% monthly core PCE inflation is consistent with our Fed call of no rate hike at the September FOMC meeting. If our forecast materializes, we think that a majority of FOMC participants will see three months of benign core PCE inflation (0.1-0.2% m-o-m) from June through August as progress toward the Fed’s 2% inflation goal, leading to no rate hikes at the upcoming September FOMC meeting. In dated UST supply this week, we have $58 BN of 3 year UST auction on Tuesday, $39 BN of 10yr UST auction on Wednesday & $22 BN of 30 year US bonds on Thursday. Fed speak last week was mostly dovish with both Waller & Williams advocating for a hold in Sep FOMC meeting. The low intensity conflict in middle east continues with increase in shipping attacks seen on the weekend. We are now expecting Brent to break out from the narrow range of 85-95 levels to move towards 110 levels if current hostilities continue. Iran seems to be taking a position of ensuring higher crude prices so that US elections get affected for Trump but Trump does not seem to care about the elections anymore. The larger issue at hand is that post US elections on 3rd Nov, Iran won’t have any leverage on Trump & then Trump can choose to take any action he deems fit. That should worry IRGC bosses. Time is running out for Iran to make a deal with US. In RoW events, we have ECB meeting on Thursday where we expect a neutral hike of 25 bps. We also have German state election results on Sunday, German industrial production, Euro Area Sentix survey & UK GDP data this week.