Quiet Final Day of October Trading as Investors Look Ahead to Next Week’s Payrolls

Stocks, Treasury yields and swap rates all fluctuated close to unchanged as foreign exchange markets dominated the final trading day of October.  Overnight, the Bank of Japan surprised economists by holding monetary policy steady, attributing their miss in inflation forecasts to the fall in oil prices.  The yen rallied as a result, even as the BoJ downgraded its growth and inflation projections going forward.  Japan’s economy faces headwinds stemming from China’s slowdown, which fueled speculation that the BoJ would add to its current 80 trillion yen annual pace of expansion of the monetary base.  The BoJ expressed disappointment that it’s record stimulus hasn’t done more to boost inflation, which highlights the limits of monetary stimulus alone.  The Chinese yuan also had a big day, surging the most against the dollar since the currency peg was removed 10 years ago.  The move was driven by reports that the People’s Bank of China is considering easing capital controls, as Beijing looks to reforms that would allow them to be included in the IMF’s special drawing rights.

Wednesday’s FOMC statement clearly indicated a December rate hike is on the table, but today’s US economic data did little to support one.  Consumer spending in September recorded its smallest gain in eight months, personal income was close to unchanged, and a price index for consumer spending fell 0.1%, its first decline since January.   A separate report showed the Employment Cost Index, considered the broadest measure of labor costs, increased 0.6%, but remains well below the level needed to drive inflation closer to the Fed’s 2% target.  Nevertheless, next Friday’s jobs report and the accompanying wage data will likely play a huge role in whether or not the Fed will act in December.

Aside from today’s data and typical month end flows, the market also gets a number of corporations reporting earnings and numerous Fed speakers including Lacker, Williams, and George.  The US Treasury announced it rescheduled this past Wednesday’s $26 billion two-year note auction for 11/4.

Have a great weekend.