Ahead of the game: 7 October 2024

Middle East tensions weigh on US share markets

US share markets eased this week, weighed down by simmering Middle East tensions and caution ahead of the all-important September payrolls report.

Closer to home, the ASX 200 made a fresh record high of 8285.7 on Monday before turning lower as risk sentiment deteriorated following this week's escalation in Middle East geopolitical tensions.

The week that was: highlights

• Fed Chair Powell sounded less dovish, noting that two quarter-point rate cuts could still be on the table this year if the economy aligns with expectations
• ISM manufacturing index remained at 47.2 in September, the same as in August, for six straight months in contractionary territory
• JOLTS job openings data were stronger than expected, rising by 329,000 in August to 8.04 million, above expectations of 7.755 million
• ISM Services PMI jumped 3.4 points to 54.9 in September, surpassing the consensus of 51.7, marking the highest since February 2023
• Initial jobless claims rose by 6,000 to 225,000 last week
• In the euro area, inflation eased to 1.8% year-on-year in September, falling from 2.2% prior
• In China, the Caixin Manufacturing PMI for September fell to 49.3 from 50.4 prior, its lowest since July 2023
• In Australia, retail sales rose by 0.7% in August, boosted by unseasonably warm weather
• Crude oil surged 8.4% this week to $74.00 per barrel on rising Middle Eastern geopolitical tensions
• Gold consolidated its recent gains to be trading at $2,656
• Wall Street's gauge of fear, the volatility (VIX) index, surged to 20.48 from 16.95.

Key dates for the week ahead

Australia & New Zealand

• AU: NAB Business Confidence (Tuesday, 8 October at 10.30am AEST)
• AU: Reserve Bank of Australia (RBA) Meeting Minutes (Tuesday, 8 October at 11.30am AEST)
• AU: Westpac Consumer Confidence (Wednesday, 9 October at 10.30am AEST)
• NZ: Reserve Bank of New Zealand (RBNZ) Interest Rate Decision (Wednesday, 9 October at 12.00pm AEST)

China & Japan

• CN: Consumer Price Index (CPI) and Producer Price Index (PPI) (Sunday, 13 October at 12.30pm AEST)
• CN: Trade Balance (Sunday, 13 October at 2.00pm AEST)

United States

• US: Federal Open Market Committee (FOMC) Meeting Minutes (Thursday, 10 October at 5.00am AEST)
• US: Consumer Price Index (CPI) (Thursday, 10 October at 11.30pm AEST)
• US: Producer Price Index (PPI) (Thursday, 10 October at 11.30pm AEST)
• US: Michigan Consumer Sentiment (Saturday, 12 October at 1.00am AEST)

Europe & United Kingdom

• UK: Gross Domestic Product (GDP) (Friday, 11 October at 5.00pm AEST)

Key events for the week ahead

• AU

RBA meeting minutes

Tuesday, 8 October at 11.30am AEST

The minutes from the Reserve Bank of Australia's September meeting are scheduled to be released on Tuesday, 8 October at 11:30 am.

At its September board meeting, the Reserve Bank of Australia kept its official cash rate on hold at 4.35% for a seventh consecutive meeting. In the accompanying statement, the RBA retained its note from last month that while higher interest rates are working to bring demand and supply closer to balance, underlying inflation has been above the midpoint of the target for 11 consecutive quarters and 'has fallen very little over the past year'.

The RBA retained the sentence that the board wasn't 'ruling anything in or out,' providing it with some optionality if underlying inflation readings were to ease in the months ahead. However, it also retained the sentence at the end of the statement: 'The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.'

While the statement read hawkish, the tone of the press conference that followed was more dovish. The RBA governor confirmed that the option of rate hikes was not discussed and that the question was 'whether or not the messaging should change'.

The meeting minutes will be scrutinised for any discussions by the RBA board on rate cuts by other central banks and insights into how close the RBA might be to considering a similar move. The rates market is pricing in 17 basis points of rate cuts for December and a cumulative 70 basis points for May 2025.

RBA cash rate

• CN

CPI and PPI

Sunday, 13 October at 12.30pm AEST

Despite China's consumer inflation accelerating in August to its fastest pace in six months, it was largely attributed to higher food costs from weather disruptions. Underlying pricing pressures have not been broad-based, which suggests that domestic demand remains weak and does not offer much reassurance around China’s economic recovery. To reinforce that, producer prices in August worsened to a four-month low at -1.8% year-on-year.

Looking ahead, deflation concerns are likely to persist. Expectations are for China’s September consumer prices to contract 0.3% year-on-year, a reversal from the 0.6% expansion in August. Producer prices are expected to contract 2.3% from a year ago, worsening from the 1.8% contraction in August.

That said, market participants have managed to look past the weaker-than-expected Purchasing Managers' Index (PMI) figures this week, as optimism around China’s recent stimulus prevails. Expectations are that any policy success from the recent series of stimulus may come with some lag; one to watch is whether market participants can shrug off upcoming weakness in pricing pressures as well.

China's CPI and PPI figures

• US

FOMC meeting minutes

Thursday, 10 October at 5.00am AEST

At the recent Federal Open Market Committee (FOMC) meeting, the Federal Reserve kept interest rates unchanged but indicated that future rate hikes may still be on the table to combat inflation. Discussions around the rate decision will be scrutinised in the upcoming Fed minutes, especially as policymakers' opinions were not fully aligned, with some members advocating for immediate action.

The latest Federal Reserve economic projections showed that while economic conditions may be softer than in its June projections, the overall forecasts do not seem to signal a recession ahead. While the unemployment rate was revised higher to 4.4% (from 4.0% prior) and real gross domestic product (GDP) growth was slightly lower for 2024 (2.0% vs 2.1% prior), they are expected to remain at these levels for 2025 and beyond.

Policymakers' views on the economy will likely be under scrutiny as well, with a soft-landing narrative likely to be reiterated, in line with recent communications from Fed officials. Market participants will also be seeking clues on policymakers' conviction around upcoming rate decisions.

US Fed funds rate chart

• US

CPI and PPI

Thursday, 10 October at 11.30pm AEST

In August, the annual headline inflation rate in the US cooled for the fifth straight month, dipping to 2.5%. This marked the lowest level since February 2021, down from 2.9% in July and below the 2.6% expected.

The annual core inflation rate, which excludes the more volatile food and energy sectors, remained at a three-year low of 3.2% in July 2023, matching market expectations. The monthly core inflation edged up to 0.3% from 0.2%, above forecasts of 0.2%.

The preliminary expectation for August is for annual headline inflation to ease to 2.3% and core inflation to fall to 3.1% year-on-year. The rates market is pricing in 34 basis points of Federal Reserve rate cuts for November, with a cumulative 70 basis points of rate cuts priced in by year-end.

US core inflation annual rate

• US

Q3 2024 earnings season

The third-quarter earnings season kicks off next week, starting as usual with the big banks. You can read a full preview of what to expect from the big banks written by my colleague Jun Rong Yeap.

US Q3 earnings release date