The upcoming week will feature a series of economic releases, central bank policy decisions and an international election that will affect asset pricing and expectations for interest rates.
Both the Federal Reserve and European Central Bank will deliver policy decisions with the Fed expected to hold rates ahead of the midterm elections and the ECB also likely to keep rates on hold despite the renewed rise in energy prices, which have pushed headline inflation to 3.8%, its highest level since 2023.
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The ECB, though, is closely monitoring the French debt crisis, which is deteriorating in real time. A sharp rise in bond yields, particularly in France, has materially tightened financial conditions since the ECB’s last meeting.
These tighter conditions should weigh on growth and in turn inflation, reducing the need for an immediate rate increase.
What’s more, the ECB will be wary of adding to the pressure on a clearly stressed debt market in some countries. The market is pricing in virtually no chance of a rate hike.
Indeed, The OATS-Bunds spread has already blown out to around 175 basis points, levels not seen since the euro area debt crisis.
While the rise in French yields is not yet enough to cause the ECB to intervene by using the Transmission Protection Instrument, which allows the ECB to buy sovereign debt to ease a disorderly market, the growing risk of contagion may eventually force its hand.
That point has not arrived, though. The surge in French yields is more a response by investors to the lack of credible fiscal consolidation than it is a result of a market that is out of control.
In the U.S., the first look at gross domestic product for the third quarter will be published. The RSM forecast implies 3.4% growth though that rate may be higher because of continued investments in AI infrastructure, robust spending by upper-income households and elevated government spending.
The GDP data will capture both the peak of spending following the tax cut implemented this year and a one-time boost to corporate earnings from tariff refunds.
In addition, personal income and spending data, as well as the closely watched personal consumption expenditures price index, will be published that will illustrate once again that spending will outpace income growth.
The headline PCE index is expected to jump by 0.5% on the month and by 3.6% from one year ago, which will capture both the growing affordability pressures on households and the steady decline in inflation-adjusted wages since April.
On Oct. 27, the Israeli election will feed into investors’ views of the conflict in the Middle East and the price of Brent crude, which on Thursday was testing $112 per barrel.
On Oct. 28, UK Chancellor of the Exchequer John Healey will deliver a budget that will attempt to provide some relief to British households over higher energy prices while calming global investors who are looking for an excuse to send gilts higher and the pound lower.
While Healey will attempt to deliver a “no-harm budget,” those temporary and targeted relief measures will not be accompanied by any real spending restraint. For this reason, fresh questions about the government’s credibility will ensue.
Not to be overlooked next week will be the Treasury’s auctions of 2-year debt on Monday and 5-year debt on Tuesday.
The 2-year auction will provide forward-looking information on private sector expectations on the Fed policy rate, and the auction of 5-year notes, which are the benchmark for corporate borrowing, will give a sense of the cost of capital for businesses.