FederalReserve officials will again convene in the coming week to discuss monetary policy, but investors will be more focused on what it may mean for a rate hike in December.
The Federal Open Market Committee will meet beginning Tuesday with an announcement set for mid-afternoon Wednesday. A press conference is not scheduled for Wednesday afternoon, leading many to discount this meeting as the one in which ithe Fed makes its first move of the year. Fed members have also shown reluctance to rock the boat ahead of the U.S. presidential election the week after.
Rather, investors will eye this meeting for signs the Fed is massaging markets for a likely December rate hike. Fed Chair Janet Yellen strongly telegraphed last December's rate hike, the first move higher in nearly a decade, months beforehand.
"Tweaks to the statement will be closely watched for how strongly the Fed flags a Dec. rate hike," TD Securities analysts wrote in a note. "Changes should come from upgrades to the economic update, the balance of risks assessment and the case for a rate increase, all signaling a Dec hike is probable without actually naming the 'next meeting.' Lack of more explicit language suggests market reaction will be limited given current pricing, although we think the risks lie toward a slightly more hawkish lean."
The chances of a November rate hike currently sit at just 9%, according to CME Group Fed funds futures. December has a far better chance at 71%.
Fed officials said the case for a rate hike had strengthened at their September meeting, though business investment remained soft, inflation held below a targeted 2%, and global risks continued. Still, growing dissent among the Fed -- with three voting to hike rates in September, up from one in July -- made a 2016 hike a high probability.
The October jobs report will also heavily play into how eager the Fed is to raise rates sooner than later. The nonfarm payrolls report, the most closely watched release of the month, is expected to show the U.S. economy adding jobs at a healthy rate. Economists anticipate 173,000 jobs to have been added to nonfarm payrolls in October, accelerating from 156,000 in September. The unemployment rate is expected to dip to 4.9% from 5%, while average hourly earnings should climb to 0.3% from 0.2%.
"The increase in payrolls, combined with the ongoing improvement in wages, should boost household income and keep consumption on track," said Barclays' Rob Martin, who predicts 175,000 jobs to have been added in October. "We also believe at these numbers employment growth is sufficient to keep the Fed on track for a December rate hike."
Elsewhere on the economic calendar in the coming week: Personal income and outlays for September, and Chicago PMI for October will be released on Monday; motor vehicles sales for October, the ISM Manufacturing Index for October, and construction spending for September on Tuesday; the ADP Employment Report for October on Wednesday; productivity and costs for the third quarter on Thursday; and international trade for September on Friday.
Wall Street enters the second half of the third-quarter earnings season in the coming week. Nearly three-fifths of companies have reported earnings so far with 72% having beat profit estimates.
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