Well, of course, ‘it depends.’ The reaction function of the Fed’s monetary policy depends primarily on two factors: the state of the labour market and the intensity of domestic price pressures. Neither have been impacted, nor have the US’ financial vulnerabilities been exacerbated by the turmoil in financial markets. We may receive further evidence this week that inflation is on track to meet the Fed’s 2% target, while the labour market continues to be at the state of full employment. Both are arguments in favour of tighter monetary conditions going forward. Therefore, although recent stock market instability drove the S&P 500 into negative territory year-to-date, the decline of the index might just fall short of the extent that could force the Federal Reserve to rethink its tightening policy.
Markets will have no time to take a deep breath this week, as the economic diary is fully packed with key macroeconomic data that has the potential to influence asset prices. Most importantly, PCE inflation, manufacturing confidence indicators and labour market figures will be published in the US, including the very closely scrutinised wage growth number. In the Eurozone, Q3 GDP will be published which may challenge the ECB’s view that growth in the Euro Area remains solid and broad-based. Meanwhile, the Bank of England decides on the policy rate this week, when Governor Carney might provide further guidance on the timing of the next hike.
In emerging Asia, all eyes will be on Chinese PMI data from October. Should the indicator show stability, markets will find comfort in the idea that trade tensions have had no significant impact on the underlying strength of Chinese economic activity. In Latin America, Mr. Bolsonaro’s efforts to form a government will be watched closely, while the Argentine’ crisis management may support markets. Macro data should gain greater importance as the election in Brazil is behind us. As a result, Mexican GDP data from Q3 will be particularly important this week. Meanwhile in Africa, speculation about South Africa’s credit rating will probably continue.