Inflation data may jolt stocks, bonds and currency markets

The U.S. dollar is likely to find support if traders walk away from the PCE release expecting a diminished Fed interest rate cut outlook

• The euro is up against the U.S. dollar after a round of upbeat economic data.
• Eurozone CPI and U.S. PCE inflation figures are now in focus for the markets.
• Cooling Fed rate cut bets might spook stocks and bonds as the dollar gains.

Financial markets grasped in vain for a unifying narrative as a flood of big-splash headlines began to hit the wires. Stock markets struggled for direction. A splashy earnings report from Alphabet (GOOG) cheered the tech-minded Nasdaq 100 for a bit, but that proved fleeting. The broader S&P 500 benchmark was listless for a fifth day straight.

Bond markets struggled with conflicting signals as a private sector estimate of U.S. jobs growth from Automatic Data Processing (ADP), an HR services giant, topped forecasts. It said payrolls rose by 233,000 in October, the most since July 2023. On the flip side, third-quarter gross domestic product (GDP) growth was a bit cooler than anticipated.

The U.S. dollar was mostly lower, pulling back from the six-week high recorded yesterday against an average of its major counterparts. The euro was particularly buoyant as Eurozone gross domestic product (GDP) and German consumer price index (CPI) inflation data produced stronger outcomes than expected, cooling European Central Bank (ECB) rate cut speculation.

The euro is on the march, but will it last?

Germany and France grew faster than expected in the third quarter, while Italy lagged. That translated into a quarterly GDP rise of 0.4% for the currency bloc, doubling the 0.2% foreseen by economists. German price growth quickened to 2% year-on-year, a three-month high. It was penciled in at 1.8% ahead of the release.

The spotlight now turns to CPI data covering the Eurozone as a whole. It is expected to show a pickup to 1.9% year-on-year in October from 1.7% previously. Germany’s numbers might tilt expectations to the high side, so a surprise in that direction may have little market-moving potential. A soft result could be asymmetrically more potent.

Leading purchasing managers’ index (PMI) data from S&P Global said output prices rose at the slowest pace this month since February 2021. The euro may recoil lower if this foreshadows cooler price pressure overall, despite Germany’s bubbly result. As it stands, the ECB is priced in for one more 25-basis-point (bps) cut this year with a probability of 86%.

U.S. PCE inflation data may hurt bonds and revive the U.S. dollar

U.S. inflation data is also on the menu. The Fed’s favored inflation gauge, the personal consumption expenditure (PCE) price index, is seen falling to 2.1% year-on-year for September. That would be the lowest since February 2021. The core reading excluding volatile food and energy prices—the focus for Federal Reserve officials—is seen at 2.6%.

On balance, this would imply that the kind of disinflation the central bank wants most—that of the core services sector—has broadly stalled. A read in line with expectations would match the May-July average, where the only meaningful movement was a pop to 2.7% in August. The Fed previously resisted rate cuts amid such conditions.

Moreover, the annualized three-month PCE growth rate already strayed from a five-month disinflationary trend in August. This seems like the kind of bottleneck that makes policymakers nervous. Finally, Citigroup analytics still suggest that U.S. economic news-flow is presently biased toward upside surprises.

The U.S. dollar is likely to find support if traders walk away from the PCE release with a diminished Fed rate cut outlook. Bonds may see renewed selling pressure as yields rise in this scenario. Stock markets may wobble. Rate futures imply at least one 25bps cut before the end of the year, along with a 28% probability of a second.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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