Will US inflation matter more than jobs?

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US inflation data to be released on Friday will put to the test Federal Reserve chair Jay Powell’s recent assertion that the labour market, rather than rising consumer prices, presents the more immediate risk to rate-setters.

Year-on-year inflation — measured by the Fed’s preferred metric of personal consumption expenditures — is expected to have risen to 2.7 per cent in August from 2.6 per cent in July, according to economists polled by Reuters.

So-called core PCE, which is especially closely monitored by the central bank as it strips out volatile food and energy prices, is expected to remain steady at 2.9 per cent.

Friday’s figures will come nine days after the Fed cut interest rates for the first time this year, lowering the benchmark federal funds target range by a quarter of a percentage point to 4-4.25 per cent.

Powell used his post-decision press conference to highlight the weakening US labour market. “The labour market has softened. The case for there being a persistent inflation outbreak is less,” he said on Wednesday.

Traders are already confident that the Fed will again cut rates by a quarter point when it meets in October. Lower than expected PCE data on Friday would strengthen their case, according to Bank of America strategists, even as jobs numbers are likely to attract relatively more attention over the coming months following Powell’s warning.

“A soft PCE print would marginally increase the risks of another Fed cut [in October],” BofA said in a note to clients. “But we think the October policy decision will ultimately hinge on the labour data.”

The latest employment report showed that only 22,000 jobs were added in August, underlining concerns over a stalling labour market. George Steer

Will UK business activity continue to pick up?

UK investors will focus next week on S&P Global’s flash purchasing managers’ indices for September, the first key indicator of UK economic activity this month, due out on Tuesday.

The indices are closely watched by the Bank of England, which uses business surveys to gauge the pace of underlying economic growth. Last Thursday, when the bank held its policy interest rate unchanged at 4 per cent and slowed the pace of “quantitative tightening” — in which it is reducing the amount of gilts on its balance sheet, previously built up during periods of quantitative easing — policymakers noted that PMIs suggested activity “had picked up somewhat over recent months”.

Economists polled by Reuters expect the Composite index, which combines the services and manufacturing sectors, to come in at 53, a slight fall from 53.5 in August but still well above the 50 mark that separates expansion from contraction.

As in recent months, services are expected to drive growth. Economists expect a services PMI of 53.9, marginally down from the 54.2 registered in August.

Sandra Horsfield, an economist at Investec, expects a slightly lower services reading of 53.5, as businesses “may be looking at the upcoming Budget with a note of trepidation”.

S&P Global’s manufacturing PMI is expected to fall to 46.9 in September from 47 in August, indicating a further decline in manufacturing activity.

The PMIs will also offer some sign of how policy changes, such as increases in employer taxes and minimum wages from April, are having an impact on inflation and employment.

The BoE appears to be less worried than previously about the deterioration of the labour market. “There appeared . . . to be less of an immediate risk that the labour market would loosen very rapidly,” it said in the minutes of this week’s policy meeting. Valentina Romei

Can Switzerland avoid a return to negative rates?

The Swiss National Bank is widely expected to keep its benchmark policy interest rate at zero when it meets on Thursday. 

Traders are putting a roughly 95 per cent chance on the SNB holding rates steady, according to levels implied by swaps markets. But investors will be watching closely for any signs that recent pressures on the Swiss economy are pushing the central bank in the direction of negative interest rates. 

Policymakers are reluctant to return to negative rates, three years after their last experiment with sub-zero rates ended, given the effects they have on savers and other parts of the financial system.

But they are grappling with the effects of US tariffs and a surge in the Swiss franc, which has pushed the dollar down 12 per cent this year to below SFr0.80 for the first time since the franc’s shock 2015 appreciation. Both effects are expected to weigh on the country’s negligible inflation, which briefly dipped into negative territory this year. The US last month imposed an import tariff of 39 per cent on most Swiss goods.

The market is putting only a roughly one-in-three probability on a quarter-point cut by the middle of next year. “The SNB would not take this decision lightly, and we think would need to see concrete risks of medium-term deflation [before cutting],” said analysts at BNP Paribas. Ian Smith