Mixed Economic Data Shifts Fed Rate Hike Expectations

Last week's economic indicators were mostly strong, with initial jobless claims dropping to near a 57-year low and ADP private payrolls increasing by 90,000 in September. However, Friday's employment report was disappointing, as nonfarm payrolls rose just 29,000, significantly below expectations, while July and August figures were revised down by a combined 60,000. The unemployment rate edged up to 4.2%. These mixed signals have led to a shift in market expectations for Federal Reserve rate hikes, with the odds of a 25-basis-point hike in October falling to 22% and the likelihood of one in December rising to 67%.

This week's economic calendar is relatively light, with the FOMC meeting minutes on Wednesday being the main event. These minutes are expected to reveal the level of support within the Federal Reserve for tightening monetary policy beyond what the September dot plot suggests. Fed Chair Kevin Warsh noted that the September hike 'removed a dose of accommodation,' implying that the federal funds rate remains below the neutral rate. The median longer-run neutral rate estimate has risen to 3.25%, a post-pandemic high.

The FFR futures market is more hawkish than the Fed officials' median projection, implying 3.3 rate hikes over the next 12 months and 1.7 over the next six months. The 2-year Treasury yield stands at 4.78%, well above the 4.00% top of the FFR target range, with 12-month futures at 4.70%. Other key data points this week include the ISM non-manufacturing PMI on Monday, ADP employment on Tuesday, and initial jobless claims on Thursday.

Globally, Eurozone retail sales excluding autos fell 0.6% month-over-month in July, and August's data will indicate whether this was a temporary dip. Bank of England Governor Andrew Bailey may signal whether rising energy prices warrant a rate hike when he speaks at the Central Bank of Turkey's conference on Thursday. In Canada, the employment report for September is expected to show whether the August job loss of 41,700 was an anomaly, with the unemployment rate holding at 6.4%.