Next week will be shortened by US holidays, which should bring some calm to the market after the recent big swings. Slowing inflation and weakening jobs data have reinforced the view that the Federal Reserve is done raising interest rates, and momentum is now building behind the view that the central bank will be in a position to cut aggressively rates next year. There are now almost 100 basis points of cuts priced in, with May seen as the possible starting point. We continue to see the risk of a sharper slowdown in economic activity, which could mean the Federal Reserve ends up cutting interest rates more aggressively than the market is currently pricing in.
In terms of next week’s data, we will closely monitor housing numbers, durable goods orders, and jobless claims. Homebuilder confidence is falling as mortgage rates rise to 8%, leading to even weaker mortgage application numbers. As a result, we expect existing home sales to fall to new cycle lows. Meanwhile, durable goods orders will fall sharply due to volatility induced by Boeing’s order book, so we will put more emphasis on the core measure (which excludes defense and aircraft orders) and that should continue to rise. Jobless claims numbers will likely be the biggest driver of the market. Initial claims are still quite low, indicating that companies are reluctant to lay off workers, but continuing claims are rising, suggesting a growing reluctance to hire, effectively indicating that the labor market is cooling, but not collapsing. Another big rise in jobless claims could lead the market to more aggressively anticipate rate cuts next year.
We will also look at the minutes from the FOMC meeting on November 1, but this is likely to move the market less than usual given the weak data post-meeting. We’ve already heard from several Fed officials who welcomed the direction of the numbers, but commented that they want to see more of the same to be sure inflation is on track for 2%.