US futures lower with earnings eyed

October 31, 2017 09:52 AM

U.S. employment costs expected to see moderate growth; EUR edges lower on mixed inflation and growth data; BoJ revises inflation forecasts lower and retains accommodative stance.

U.S. equity markets are on course to open a little higher on the final trading day of the month, with the S&P 500 and Dow eyeing new record highs as more companies line up to report on the third quarter.

U.S. Employment Costs Expected to See Moderate Growth
While it’s been a busy session in Europe with notable economic releases from the eurozone and overnight with the Bank of Japan making its latest monetary policy decision, the U.S. is looking a little quieter, with the bulk of the week’s economic events coming over the course of the next few days. The only notable U.S. releases due today are the employment cost index which has been gradually improving but remains quite volatile. Higher costs typically mean higher prices and go some way to explaining why the inflation data has underperformed expectations.

The euro is edging lower on Tuesday following a mixed batch of economic data that will likely complicate matters should it continue into next year. The eurozone economy grew by 2.5% last quarter compared to a year ago, while unemployment fell below 9% for the first time since January 2009, in a clear sign that the region remains on a positive trajectory and is continuing to gather momentum.

EUR Edges Lower on Mixed Inflation and Growth Data
While that will be reassuring to ECB policymakers as they wind down their stimulus program on the expectation that it will lead to higher inflation, the CPI numbers themselves will be less encouraging. Prices rose by 1.4% in October compared to a year ago, while core prices rose by only 1.1%, both of which are well below the ECB's sole mandate of below but close to 2% inflation. While the other economic data may give the impression that this will improve over the medium term, the experience of other central banks should act as a warning against such assumptions and discourage against being too keen to tighten.

One of those that can vouch for this is the BoJ, which is dealing with unemployment at 2.8%, annualised growth of 2.5% and yet inflation remains at only 0.7% which is the highest in two and a half years, at which point it was only higher as a result of the sales tax increase. The central bank overnight left its monetary policy unchanged and reduced its inflation forecasts for the year to March 2018 to 0.8% from 1.1% in a further sign that the job of driving inflation to 2% is far from straightforward in the current economic environment.

BoJ Revises Inflation Forecasts Lower and Retains Accommodative Stance
Still, the central bank is convinced it will happen gradually and remains committed to achieving its target, albeit not yet through more stimulus as one dissenter on the board preferred. The yen softened a little overnight in response to the downward revision to inflation expectations and continues to trade around its lowest levels in six months against the dollar. Should the dollar have a strong end to the year as looks possible, we could see the pair trading back at levels not seen since the end of last year.

About the Author

Craig Erlam is senior market analyst at OANDA who also writes for OANDA’s Market Pulse site,