This week's crucial US economic data, particularly the September labor market report and August Personal Consumption Expenditures (PCE) price index, are anticipated to bolster the case for the Federal Reserve to implement another interest rate hike in October. The US economy continues to show resilience, with the composite PMI for September outpacing the Eurozone, UK, and Japan, which supports the dollar's yield advantage. Foreign investors have also accumulated $1754bn in long-term US securities over the past year, indicating strong underlying demand for the USD, more than twice the -$743bn US trade deficit.
The September nonfarm payrolls (NFP) report, due Friday, is a key highlight, with consensus estimates at +90k new jobs, down from +162k in August. The unemployment rate is projected to remain at 4.1% for the third consecutive month, aligning with the FOMC's 2026 forecast and suggesting the economy is near full employment. Other labor market indicators earlier in the week, such as the August JOLTS report and September ADP private payrolls (+72k expected), are also expected to reflect a "low hire, low fire" environment.
Wednesday will see the release of the August PCE data, which is the Fed's preferred inflation gauge. Headline PCE is expected to rise 0.4% month-over-month (m/m) and hold at 3.7% year-over-year (y/y). Core PCE, a measure of underlying inflation, is projected to increase 0.3% m/m and remain at 3.3% y/y for the third straight month. Real personal spending is expected to rebound to 0.5% m/m, after being flat in July. These figures are likely to indicate sticky underlying inflation and a rebound in consumer spending, reinforcing the Fed's hawkish stance.
Following a recent 25 basis point hike by the Fed to a target range of 3.75-4.00%, markets are currently pricing in a cumulative 33 basis points of tightening by year-end, with 18 basis points implied for October's meeting. An upside surprise in jobs data could push the implied probability of an October hike above 20 basis points. While the dollar's recent momentum has been strong, analysts suggest that a significantly hotter-than-expected PCE and a solid jobs report with firm wages would be needed to extend its current upward trend, as the USD is currently considered overbought.
