This week, there was a significant increase in the conflict in the Middle East as Israel attacked Hezbollah in Lebanon and Iran launched missiles at Israel. Despite this, the market reaction was limited. Oil prices did rise slightly, but they are still lower than the previous week. Saudi Arabia’s decision to increase production has helped keep prices down. While there is a risk that the conflict could impact energy production and exports, it is not expected to have a serious effect at this time.
One reason for the stable oil prices is the weak demand growth in China. However, Chinese authorities are now focused on supporting the housing market and boosting economic growth. This has led to a strong rally in Chinese equities. As a result, expectations for growth in China have been upgraded. Despite this, it is unlikely that the growth will lead to significant inflation that would hinder expected rate cuts.
In the Euro area, inflation has fallen to 1.8% year on year, below the 2% target. The momentum in service prices also decreased significantly in September. Due to weaker economic data and signs of easing labor markets, it is anticipated that the European Central Bank (ECB) will cut rates at the next meeting on October 17th.
In the US, job growth in September was much stronger than expected, with 254,000 jobs added. The unemployment rate also declined to 4.1%. Average hourly earnings increased by 0.4% compared to August. These positive indicators suggest that the Federal Reserve’s next rate cut will likely be 25 basis points rather than 50 basis points. However, with one more job report before the November rate decision, there is still some uncertainty.
The upcoming release of US inflation data is expected to confirm that inflation is not a major concern and will not prevent further rate cuts. The focus will be on the labor market and how sticky service inflation is, which could influence the pace of rate cuts by the Fed. With the US election approaching, political developments are also likely to impact the markets.
Overall, the global economic landscape is facing challenges and uncertainties, with geopolitical tensions in the Middle East and economic indicators in major economies influencing central bank decisions. It will be crucial to monitor these developments closely in the coming weeks.
