Intense moves on both sides of the Atlantic in recent days has been fueled by still more surprising economic data. The ADP payrolls report indicated the most substantial monthly decline in private job creation since March 2023, signaling potential shifts in labor market dynamics. Meanwhile, the Federal Reserve has formally concluded its quantitative tightening program. This decision gives rise to hopes for greater liquidity in the next fiscal year.
The conclusion of the Fed’s tightening measures has raised optimism among investors regarding potential pro-growth policies from the upcoming Federal Reserve Chair, who will be appointed next year by former President Trump. Much hope is placed on the prospect of lower interest rates or greater liquidity to jumpstart economic growth. The prospects of the US core PCE inflation gauge, due to be released for the month of September this Friday, are deepening this sentiment. That measure will be closely watched as one of the Federal Reserve’s key indicators heading into next week’s interest rate announcement.
In Europe, market responses have closely tracked changes in the U.S. The DAX index hit a three-week high close despite suffering violent losses at the beginning of the week. In October, German factory orders jumped by 1.5%, double the expected 0.5% rise and marking the biggest gain since May. Foreign demand for German goods took a nose dive, down by an alarming 4%. Notably, orders for military and defense equipment surged by 9.9%, highlighting a sector that remains robust amid broader economic uncertainties.
Investors are on Fed watch with the core PCE inflation report just around the corner. This report comes as the last obstacle before the Federal Reserve makes its next interest rate decision next week. A bad inflation number would help cool fears about price pressures, thereby building back expectations for a possible rate cut. The current Fed terminal rate sits between 2.75-3%. If the current core PCE measures go down, we might get a turning point in favor of decreasing rates.
European stock markets have been surprisingly resilient, with early trading today seeming to indicate a bullish response to these developments. Investors are growing more optimistic as expectations for Fed policy changes collide with stronger economic indicators from Germany. Together these factors plant the seeds for an increasingly complex yet exciting environment in the market.