Week Ahead: Following a Hawkish Fed Rate Cut, Focus Shifts to Updates from the RBA and BoE, and US ISM and ADP Numbers

The Week That Was

The Fed’s Hawkish Cut

I would be remiss if I did not start this post with the Fed lowering its target rate by 25 bps to 3.75% – 4.00%. Although the decision raised few eyebrows, Fed Chair Jerome Powell’s commentary certainly did.

Despite the cut, the vote was not unanimous, with two dissenters. Unsurprisingly, Fed Governor Stephen Miran voted for a 50-bp cut, while Kansas City Fed President Jeff Schmid chose to keep rates steady – a clear sign of internal division. The Fed also announced that it would wind down its holdings of government debt on 1 December.

Beyond the rate cut, the Fed’s statement noted that economic activity has been ‘expanding at a moderate pace’, while highlighting inflationary pressures along with downside risks to employment, echoing stagflation vibes. This, of course, highlights the challenging situation that the Fed currently faces, and foreshadows continued division among policymakers.

Powell’s presser was interesting and, arguably, the most impactful part of the event, stating that additional easing this year is ‘not a foregone conclusion, far from it’. Given that markets had fully priced in another cut for December’s meeting, it would appear that investors got ahead of themselves here. Markets are now pricing -17 bps of easing for December (68% probability from 100% prior to the meeting), marking a hawkish shift.

The immediate aftermath of the event saw the 2-year US Treasury yield jump by around 8 bps as market participants scaled back expectations of Fed rate cuts in the coming years. This also underpinned the USD, while weighing on Stocks and Gold.

While the market has scaled back expectations, many analysts still anticipate that the Fed will proceed with the scheduled rate cut at the December gathering. However, I feel that this is predicated on two developments: a sustained softening in the jobs market as we approach the close of the year, and the conclusion of the government shutdown, which will enable the Fed to properly gauge the nation’s economic health. Therefore, the USD’s recent upward movement could be short-lived.

Trump’s ‘temporary’ Breakthrough with China

At their first face-to-face meeting in six years, US President Donald Trump and Chinese President Xi Jinping agreed to a one-year truce. While this does not represent a comprehensive long-term deal between the two largest economies, Trump voiced willingness to further one-year extensions if ‘everything goes okay’. While I hope for the best, the pessimist in me suggests the year will unlikely be smooth sailing.

I noted in an earlier post that the interim arrangement includes China resuming US soybean purchases and suspending rare earth export controls for a year, while Trump reduced tariffs on Chinese goods from 57% to 47%. Both sides also suspended certain port fees and export controls.

Although recent developments have lowered tail risks and are a positive for economic expansion, markets have been largely muted. Investors are familiar with Trump’s aggressive posturing, followed by more moderate actual implementation.

The Week Ahead

RBA and BoE Rate Decisions on Deck

Central bank decisions this week include the RBA on Tuesday and the BoE on Thursday.

It is widely expected that the RBA will stand pat and keep rates unchanged at 3.60%, with recent inflation data pouring cold water on any near-term easing; a meagre 2 bps of cuts is priced in for the upcoming meeting, and not much is expected to happen until later in 2026. All economists polled by Reuters are also calling for a hold decision.

Despite jobs numbers coming in soft, which essentially bolsters the case for further easing – unemployment increased to 4.5% – all key inflation measures reported higher-than-expected numbers. This includes Q3 YY Aussie inflation rising 3.5% from 2.1% in the previous quarter, and the trimmed mean rising 3.0% from 2.7%.

With a rate cut off the table, language will be key. Should the RBA lean more dovish in its communication, the AUD could trade lower, while hawkish commentary may strengthen it.

Here in the UK, money markets are implying a 30% chance (or 8 bps) of a 25 bp rate cut, which would bring the bank rate to 3.75%, from 4.00%. 54 out of 65 economists polled by Reuters are calling for a no-change decision, via a 6-3 vote split (versus 7-2 at the previous meeting). Despite softening jobs data and weaker-than-expected inflation, we have to account for the fact that price pressures remain nearly double the BoE’s target – September CPI inflation remained at 3.8%. This, coupled with the uncertainty surrounding the Autumn Budget on 26 November, means the BoE is likely to hold the line this week.

Should the central bank indeed press the pause button, a short-term push higher in the GBP could be seen, while a 25-bp rate cut would weigh on the currency. As usual, the MPC vote split will be key to watch, with economists expecting a 6-3 vote in favour of a hold (versus 7-2 in the previous meeting). Together with the decision, we’ll receive updated economic quarterly projections, with the consensus view that the central bank will largely align with the previous MPR estimates.

US Data: ISM and ADP Eyed

With official government data still unavailable due to the ongoing shutdown, the upcoming ISM and ADP data will carry more weight this week.

Traders will pay particular attention to the employment and prices paid components of the ISM manufacturing and services reports today and Wednesday, respectively. Should the release show any weakness in hiring or price pressures, this will bolster the case for a cut in December, while more robust readings will reinforce Powell’s recent comments. In terms of the ADP print (Wednesday), the recent trend continues to point to a weakening in hiring momentum, with the September report showing the US cut 32,000 jobs, defying estimates for a 50,000 gain.

Ultimately, for both reports, weaker-than-expected numbers could weigh on US Treasury yields and the USD, as well as provide a bid in Stocks and Gold. Stronger data, of course, would likely have the opposite effect.

Written by FP Markets Chief Market Analyst Aaron Hill