Markets Eye U.S. Elections and Digest Employment Data | Daily Market Analysis

Key events:

Eurozone – ECB President Lagarde Speaks

U.S. stock indices were up in trading on Friday but finished the week in the red, and the drop in Nasdaq Composite became the maximum since January. Most importantly, the market was supported on Friday by the statistical data on unemployment in the USA for October, which showed that the labor market remains strong, but began to lose momentum to growth.

​

The number of jobs in the U.S. economy rose by 261,000 last month. The rate of increase slowed from 315,000 in September and was the lowest since December 2020. At the same time, it beat the average forecast of 200,000 by experts polled by Trading Economics.

The published data, however, did not change experts' expectations for Fed policy. Futures quotations for the level of the base interest rate still point to its probable rise to 5% by the spring of 2023.

Amid this NFP data, rising unemployment, declining wage inflation, and rumors of a reopening of China after COVID restrictions, the dollar index fell sharply, but will likely bounce back as long as it stays above 110. Experts point out that if it falls below 110, further bearish sentiment will set in.

​

Let us remind you that the key event this week will be the midterm elections in the United States. To recap: there are 435 seats in the House of Representatives and 35 in the Senate at stake.

If in the first case the Republicans win with a high probability, in the second case, there is no obvious favorite. However, judging by the latest polls, the Democrats will also lose their majority there.

A right-wing victory is bound to make things difficult for Team Biden. In addition to canceling Social Security and Medicare, Republicans could block the president's nominations for federal judges.

Another serious problem for the near future is another negotiation between Republicans and Democrats on the subject of the national debt ceiling. As you know, the current limit of the U.S. national debt is $31.4 trillion. Not so long ago the size of this very debt broke through up to $31 trillion. This is 136.62% of the U.S. GDP.

Curiously enough, midterm elections tend to have little impact on stocks. Investors are far more concerned about the threat of slower economic growth, continued inflationary pressures, and a tightening of monetary policy by the Fed.

What's going on with the pound? A new prime minister was elected, tax cuts were abandoned, the rate was raised, and the pound is still losing altitude. So what didn't the traders like this time? The strengthening dollar and the regulator's words about a prolonged recession.

​

The Bank of England predicts that the country's GDP will fall by about 0.75% in the second half of 2022. Analysts at EY are slightly more optimistic: the situation will normalize in the second half of the next year.

Only time will tell who will be right. And meanwhile, the country's central bank will have to find a balance between fighting inflation and economic growth. Excessively tight monetary policy may eventually hit the labor market, and then stagflation will not be far behind.