Market Outlook for the Week of twenty first October – twenty fifth October

The week starts quietly on Monday with no significant economic events scheduled for the FX market.

On Tuesday, the U.S. will release the Richmond manufacturing index, offering some early insights into the country’s industrial performance.

Wednesday’s focus will be on Canada, where the BoC is set to announce its monetary policy decision. In the U.S., attention will turn to the existing home sales data, providing a glimpse into the state of the housing market.

Thursday brings a series of flash PMI releases, with both manufacturing and services data expected from Australia, Japan, the eurozone, the U.K., and the U.S.

Finally, Friday will see Japan release the Tokyo core CPI y/y, while Canada reports retail sales figures. In the U.S., key data releases include durable goods orders m/m, as well as the revised University of Michigan consumer sentiment and inflation expectations.

At this week’s meeting, the BoC is expected to deliver a 50 bps rate cut, reducing the overnight rate from 4.25% to 3.75%. This cut would be larger than previous ones, driven by the recent economic slowdown and the fact that headline inflation in Canada dropped below the Bank’s desired 2% target in September. Core inflation currently sits between 2.0% and 2.5%.

Given the recent economic slowdown, there is little upside risk to inflation. Another factor to consider is that higher rates are further hurting the economy and that the impact of any interest rate decreases will take time to have an impact. Considering that the BoC considers the neutral rate range to be between 2.25% and 3.25%, analysts from Royal Bank of Canada expect a 50 bps cut now followed by another 50 bps one in December and other cuts next year in order to stop the softening of the economy by mid-2025.

This week’s PMI data for the eurozone will be important to watch, as it could provide clues about the ECB’s next move. The consensus for the manufacturing PMI is 45.3, while for the services PMI, it is 51.5.

The manufacturing sector is expected to continue showing weakness and to remain in contractionary territory despite small gains, while a slight improvement in the services sector is also likely. For now, the market anticipates another rate cut from the ECB in December.

In the U.K. the consensus for the flash manufacturing PMI is 51.5, unchanged from the previous 51.5, while the flash services PMI is expected to be 52.3, slightly down from the prior 52.4.

Both manufacturing and services PMIs for the U.K. are expected to remain in expansionary territory, though last month’s data for both sectors came in below expectations, which is not an encouraging sign. Despite this, analysts argue that the economy is still on track for a positive trajectory.

In terms of monetary policy, the BoE is expected to deliver a 25 bps rate cut at the November meeting. However, it remains unclear on whether this will be followed by another reduction in December and the PMI reports could sway some opinions, especially if they print above expectations.

In Japan, the consensus for Tokyo CPI y/y is 1.7% vs 2.0% prior. This data will be important to monitor, as it could provide clues about the timing of the BoJ’s next steps.

The consensus for U.S. core durable goods orders m/m is -0.1% vs 0.5% prior, while durable goods orders m/m are expected to be -1.1%, compared to the previous 0.0%.

Overall, the outlook for durable goods is not very promising, and it may take some time before the effects of the Fed’s rate cuts have an impact, particularly in business demand.

Wish you a profitable trading week.