Last week was one of those weeks where decades happen. Currency interventions, crisis management QE, war, and systemic risk have all been some of the market drivers to finish off the third quarter. It seems many of these may continue into the final three months of the year. Meanwhile central banks will continue to fight sticky and elevated price pressures with aggressive rate hikes. Risk-off sentiment has seen major equity indices fall into or just below major support levels. Rampant bond yields are consolidating just below their recent highs. The 4% mark in the benchmark 10-year US Treasury yield is key resistance so far.

It’s the first Friday of the month so that means the latest release of the US non-farm payrolls report. There are few signs as yet of any major weakness in the labour market when looking at the more frequent weekly initial jobless claims number and high vacancies. This is the last jobs data before the next FOMC meeting right at the start of November. Any cooling down would probably be welcome by risk markets with the blue-chip S&P 500 hitting bear market territory again. Dollar strength would also ease though the case for more Fed rate hikes should remain solid.  The safe haven bid for the greenback is also never far away in the current environment.

Much focus will remain on the UK, sterling and the gilt market. Questions over the funding of the UK’s biggest tax cuts in 50 years still loom even as GBP/USD bounces back. What is the right price to fund the UK’s widening budget deficit? The new Prime Minister and her beleaguered finance minister will try and shore up support as the Conservative Party conference gets under way. Volatility in UK assets is likely to continue as the crisis of confidence around policymakers persists.

Major risk events of the week

03 October 2022, Monday:

–US ISM Manufacturing: Analysts are looking for a decline to 52.4 from 52.8. A reading above 50 indicates expansion in manufacturing, which accounts for nearly 12% of the US economy. A further easing in price pressures would strengthen expectations that inflation has potentially peaked.

04 October 2022, Tuesday:

–RBA Meeting: Money markets expect a fifth consecutive 50bp rate hike. That would take the cash rate to 2.85%. Analysts see a peak rate of 3.6% in February 2023. Inflation expectations are rising, the labour market remains tight and wage growth is accelerating. But AUD will remain hostage to the global risk mood.

05 October 2022, Wednesday:

–RBNZ Meeting: Another 50bp hike is likely, maintaining the same pace as the last four meetings. The RBNZ is expected to repeat that rates will continue to rise “at pace” and to signal a higher peak for this cycle. The steep fall in the NZD could prompt a bigger hike, with a 20% chance of a 75bp move.

07 October 2022, Friday:

–US Non-Farm Payrolls: Consensus expects a headline print of 250k payroll gains.  This comes after a fifth straight beat in August. The unemployment rate is forecast to remain at 3.7%. This is likely to support wage growth which is projected at 0.3%. More strong job gains may become limited, especially if the participation rate remains subdued. 

–Canada Jobs: Canada has shed 113,500 jobs in the last three months, contrary to expectations. Analysts say this could signal that higher rates may be starting to cool the economy. But it is unlikely to force a central bank pause, with the BoC expected to hike rates at its next meeting. CAD traders will have one eye on the US NFP data.