Weird week of data to drive macro narrative

Economic data this week will be weird, and for central bankers it might not be wonderful. In the US, not only will we endure the aberration of non-farm payrolls (NFP) data being published on a Thursday, but we’ll also get several late macro data releases with the government shutdown put off until at least January. In the UK, the Gilt market is on edge after reports of the latest government U-turn, this time on income tax rises, sparked a large sell-off last week accompanied by a decent steepening at the long end. Wednesday’s CPI inflation data in the UK will also be closely watched, and the last thing the Gilt market needs is a negative surprise that undoes more of the hard-earned interest rate cuts being priced in by the sterling curve.

US rate cut at risk?

The list of late releases in the US includes data on international trade, factory orders, and others, but very clearly the focus will be on September’s NFP report. The median Bloomberg consensus stands at 50k jobs added, which would imply a mild bounce from 22k in August. Though the dispersion in the consensus survey is low, with the lowest at 41k and the highest at 75k, the number of forecasters participating is only eight at the time of writing. Typically, this number is close to eighty, so it may be the case that the median consensus gets updated as more forecasters submit their estimates.

Federal Reserve (Fed) officials have generally struck a hawkish tone in recent weeks, which has driven two-year US Treasury (UST) yields from a mid-October low of just over 3.4% to just over 3.6%. The market-implied estimate of the Fed Funds rate in 12 months’ time has also ticked up from below 2.8% to just over 3%, according to Bloomberg. Regional Fed presidents Hammack, Musalem, Kashkari, Schmid, Logan, Collins and Bostic warned in different tones last week about inflation and highlighted that further rate cuts are not an obvious outcome. Even San Francisco Fed President Mary Daly, usually a dove, sounded less convinced about a December cut. The Fed’s latest “dot plot” projection showed an overwhelming majority of FOMC members do see rates declining in 2026, with the median dot seeing rates at a range of 3.25% to 3.5% by year-end. While the probability of a 25bp cut in December has moved from basically a done deal to just a 40% probability, according to Bloomberg, at this stage we do not think the cutting cycle is being called into question but rather the timing of cuts is not set in stone.

The labour market report will no doubt be an important one for Fed officials. The stickiness of inflation is a major concern for several members, though we would wager that if labour markets deteriorated steeply from here, priorities might change not least because such a development would be disinflationary.

UK Gilt market on edge

Moving to the UK, the inflation report scheduled for Wednesday will be important. Inflation has been stuck at 3.8%, nearly double the BoE target, since July. While the rise in utility bills in April has been one of the main culprits, wage inflation continues to be a cause for concern, which in turn feeds into services categories such as Restaurants and Hotels. The rise in national insurance contributions in last October’s budget certainly did not help in this regard. The BoE has mentioned more than once that it expects 3.8% to be the peak, but with three consecutive months at this level, it’s starting to look like a small plateau rather than a peak. It is therefore crucial that market forecasts of a drop to 3.5% do materialise.

This is not only important for the Bank of England (BoE). Gilts sold off steeply on Friday on reports that the government will no longer seek to raise income taxes to address the UK budget deficit. The reason is that the Office for Budget Responsibility (OBR) projections for tax intake in the coming years might not be as bad as feared, which would give the government a little bit of wiggle room. While the Gilt market looks calm at time of writing on Monday morning, we expect volatility to continue until Budget day on November 26. Markets gave their verdict on Friday. Given the government’s unwillingness and/or inability to cut spending meaningfully, tax rises are the second best, if inefficient, choice. There are no doubt negative medium-term impacts on growth and the UK’s ability to attract foreign talent and capital should taxes go up materially, but income taxes have the advantage that in the short term at least, they are easy to collect and more difficult to evade. We will have to wait a few days to get clarity on which taxes may be increasing, but making changes to several unrelated taxes, or imposing new ones such as a wealth tax, are a lot more difficult to implement and their revenue more difficult to forecast.

The last few days have ruined some market participants’ plans for a quiet last few weeks of the year, but thus far the volatility has been more of an equity market phenomenon. As we wrote earlier this month, we don’t believe the ongoing nervousness surrounding AI and valuations will have a material impact on fixed income markets. So far, so good. Credit spreads have moved in a nervous fashion in certain pockets, such as the chemicals sector, but have largely remained within recent ranges. The moves in big tech have a much smaller impact in credit markets compared to equities, as these companies are typically investment grade bond issuers with strong credit profiles, and their debt is not huge as a percentage of fixed income indices, in stark contrast to the situation in equities.

We remain vigilant and ready to take advantage of unjustified contagion into credit spreads, but it’s fair to say there is not much to report on this front at this stage. Regarding rates, last week’s moves are an example of why we do not think Gilts are the best risk-off instrument out there at present.