Week ahead: Markets face US labour market test

Here are the week’s key events:

With the Federal Reserve signalling it will keep interest rates higher for longer in the face of surprising economic resilience and signs of cooling inflation, the focus for the market is now on the US labour market. Until that cracks the Fed will stay restrictive, so the latest nonfarm payrolls report will be the highlight this week. Elsewhere there are Australian and New Zealand central bank decisions and some PMI data out of China to consider.

Monday

Markets will be digesting the latest round of Caixin manufacturing and services PMI data from China, due on Sunday. Services activity fell to its lowest in eight months in August, though there was some improvement in the manufacturing sector. The official PMI data is slated for release a day earlier. US ISM manufacturing PMI data is due up later in the session, having contracted for 10 straight months.

Tuesday

The Reserve Bank of Australia left rates unchanged at 4.10% in September and is expected to stand pat once more. Australia’s inflation rate accelerated to 5.2% from 4.9%, likely to fuel debate about whether the RBA ought to hike again to cool it down, but it seems that it will be content to sit on the data for a while longer. Minutes from the last RBA meeting noted concerns about the outlook: “there was a risk the economy could slow more sharply than forecast…The recent flow of data was consistent with inflation returning to target within a reasonable timeframe”. Also check the JOLTS job openings figure from the US for signs of labour market health.

Wednesday

It’s the turn of the Reserve Bank of New Zealand, which seems to be facing a tough call on whether to hike again or not. Whilst it may choose to pause this week, many think it will still carry out a further hike to the OCR later in the year. Signalling around the strength of the economy and inflation will be crucial to guiding expectations. Meanwhile look for the ADP jobs report to guide the market ahead of Friday’s nonfarm payrolls.

Thursday

With the nonfarms around the corner, particular attention is on the weekly unemployment claims data from the US. These have trended lower for the last couple of months, suggesting there is ample strength in the labour market for the Fed to keep rates higher for longer. After peaking in June with three straight weeks in excess of 260k, weekly jobless claims have declined to around 220k lately, touching a 6-month low of 201k in the week September 16^th.

Friday

In August payrolls rose more than expected, while wage growth cooled – the kind of soft-landing Goldilocks scenario the Fed likes to see. Nonfarm payrolls increased by 187,000 in August, while the counts for June and July were revised down. The unemployment rate was 3.8%, the highest since February 2022 as new workers arrived and failed to be absorbed. Average hourly earnings rose 0.2% month-on-month, and +4.3% from a year ago, slightly below forecasts.