Take Five: It’s Q4 already? 

Sept 25 (Reuters) – The third quarter draws to a close, and investors have plenty to dig their teeth into. The spotlight in the coming week shines on US payrolls and US and euro zone inflation data, which will likely shape expectations for the path of interest rates on both sides of the Atlantic.

Here’s all you need to know about the coming week in financial markets by Lewis Krauskopf in New York and Naomi Rovnick, Dhara Ranasinghe, Marc Jones and Samuel Indyk in London.

1/ THE END IS NIGH

The final leg of the year begins on Thursday, as what can only be described as a testing Q3 morphs into a potentially pivotal Q4.

It’s kicking off against a tetchy backdrop. Turbulent bond markets — rattled by the Iran war, fiscal worries and a torrent of AI debt which might just be bankrolling the end of human civilisation — mean global borrowing costs are now their highest since the 2007-08 financial crash.

Not that you’d know it looking at the main world stock indexes. They are less than 2% off all-time highs and up more than 12% for the year, largely thanks to AI euphoria.

Q4 has lots in store. Peace in the Middle East or Ukraine both look unlikely. Interest rates are expected to keep going up, while the first weekend has what now seems a genuine toss-up of a Brazilian election.

The main event will undoubtedly be November 3’s US midterm elections. Current polls suggest Donald Trump’s Republican party could lose the House of Representatives and maybe even the Senate — and that could make for a very interesting end to the year.

2/ DATA DIVE

A fresh look at US employment and inflation trends in the coming week will shed light on the economy’s strength and when the Federal Reserve will hike interest rates again.

September’s nonfarm payrolls report, due on Friday, is Wall Street’s main event, following a blowout report the prior month that helped cement the Fed’s first rate hike in three years.

September payrolls are expected to rise by 100,000 jobs, with the unemployment rate at 4.2%, according to a poll of economists.

Wednesday’s release of the monthly Personal Consumption Expenditures price index will offer signs about whether persistently high inflation is moving toward the Fed’s 2% annual target.

Futures pricing suggests a roughly 50/50 chance that the Fed will again hike by a quarter point in October. In a survey released this week, a measure of prices paid by businesses for inputs surged to a nearly four-year high.

3/ INFLATION BATTLE

Investors will also get euro zone inflation data on Friday, as well as price figures from Tokyo that are viewed as a barometer for Japan.

The key question for markets is whether energy price surges have lasted long enough to cause ripple effects across major economies that may push wages, living costs, and interest rates higher.

Interest rate markets are already pricing in a faster global tightening cycle than they were just weeks ago, pushing 10-year Treasury yields above 5%. A yield that stays around its highest since 2007 is something some newer bond and equity investors have never worked with.

Hope that inflationary forces prove to be transient is battling with fears that long-term capital costs of 5% or higher will become the norm. Current market valuations could struggle.

4/ MICRON’S MOMENT

Earnings from Micron Technology, the $1.2-trillion semiconductor maker, are due after the bell on Wednesday and will provide the next test for an AI trade that has shown signs of fatigue in recent months.

Micron, a key supplier of memory chips used alongside Nvidia’s AI processors, has been a big beneficiary of the spending splurge on AI data centres, pushing its shares up over 280% year-to-date.

But its shares have fallen by more than 6% during the quarter, while the Philadelphia Semiconductor Index has shed an even steeper 14%, as investors question how long heavy capital spending can continue and whether demand growth can continue at its current pace.

If Micron’s guidance surpasses expectations, it could soothe some nerves that AI infrastructure spending is faltering or that memory supply constraints are easing.

Should guidance disappoint, the market might view it as an early sign that the AI spending boom is losing momentum.

5/ CREEPIN’ UP SLOWLY

Australia’s house prices are falling and the country’s jobless rate rose unexpectedly to a five-year high.

That’s not the best backdrop against which to be raising interest rates.

Yet a rate hike is what markets, and economists, expect the Reserve Bank of Australia to deliver when it meets on Tuesday. A quarter-point increase would take rates to a 15-year high of 4.6%.

Like most major central banks, the RBA finds itself in a bind as oil prices push back above $100.

Even after three rate increases this year, core inflation is running above the RBA’s 2-3% target range. Australia’s cash rate is now seen peaking near 5%.

Once upon a time, when house prices fell, rate cuts followed to shore up the economy. That era is likely over.

(Graphics by Vineet Sachdev; Compiled by Samuel Indyk; Editing by Jan Harvey)