Monday appears to be a relatively light day in terms of economic releases and indicators.
On Tuesday, during the Asian morning, we get the NAB business survey for September. Although usually this is not a major market mover, given the RBA’s emphasis on the labor market, we prefer to pay close attention to the Labour Costs index for the month, which, in August, accelerated to +1.2% qoq from +0.9% qoq in July. At its latest meeting, the RBA decided to cut interest rates by 25bps, to a new record low of +0.75%, and reiterated that they remain prepared to ease policy further if needed. According to the ASX 30-day interbank cash rate futures implied yield curve, another quarter-point cut is more-than-fully priced in for February. Thus, any signs suggesting improvement in the labor market may encourage participants to push that time somewhat back. From China, we get the Caixin services PMI for September, and the trade balance for the same month.
In the US, we get the PPIs for September. Both the headline and core rates are expected to have remained unchanged at +1.8% yoy and +2.3% yoy respectively, which could raise speculation that the CPIs, due out on Thursday, may have held steady as well. The NFIB Small Business Optimism index for September is also coming out, but no forecast is currently available.
On Wednesday, we get the minutes from the September FOMC meeting, when the Committee decided to cut interest rates by 25bps. The new “dot plot” pointed to no more cuts this year and the next, one hike in 2021 and another one in 2022. That said, despite the 2019 median dot suggesting that there are no more rate reductions on the table, the Committee was largely divided, with only 5 members supporting that view. Seven still believed that another quarter-point reduction may be appropriate, while the remaining 5 argued that the last cut was not needed. So, having all these in mind, we don’t expect the minutes to paint a different picture. We just expect them to confirm the disagreement with regards to the future path of interest rates. The JOLTs Job Openings for August are also coming out, but no consensus is available at the moment.
On Thursday, all eyes will be on the new round of high-level trade negotiations between China and the US. Chinese Vice Premier Liu He will travel to Washington to meet with US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin.
Following the impeachment calls against him, as well as the tumble of the manufacturing activity to a decade low (according to the ISM index), Trump may be more willing to strike a deal than a few weeks ago. Although he is unlikely to be removed from office, the recent political developments may have lessened his chances of being reelected next year, while the data suggests that the US economy is feeling the heat of this trade war even more. Thus, he may soften his stance in order to increase his chances of taking office again. On the other side of the equation, China may prefer to wait for a new US President to negotiate a deal, as this may result more favorable terms for the world’s second largest economy. That said, they would also like to avoid new tariffs. So, they may agree on a preliminary deal, or find common ground in the majority of differences, something that may prove positive for the broader market sentiment. Now, if the two sides are unable to make any progressive steps, this could lead to more tit-for-tat tariffs and thereby, further slowdown in global economic activity.
As for the rest of Thursday’s data, during the European day, we get Norway’s and Sweden’s CPI data for September. Kicking off with the Norwegian numbers, the headline CPI is forecast to have slowed to +1.5% from +1.6%, while the core rate is expected to have remained unchanged at +2.1% yoy. At its latest gathering, the Norges Bank decided to increase rates by 25bps and noted that they will most likely remain at this level in the coming period. Thus, with both rates expected to stand close to the Bank’s latest projections for the month, we don’t expect market participants to adjust much their expectations with regards to this Bank’s future course of action if the forecasts are met.
Passing the ball to Sweden, both the CPI and CPIF rates are expected to have ticked down to +1.3% yoy and +1.2% yoy, from +1.4% and +1.3% respectively. That said, once again, we will pay more attention to the core CPIF rate, which ticked down to +1.6% in August, from +1.7% in July. At its prior meeting, the world’s oldest central bank decided to keep interest rates unchanged and maintained the view that rates would be increased further towards the end of the year or the beginning of the next one. That said, further slowdown in inflation could raise speculation that Swedish policymakers may adopt a more dovish stance when they meet next, and perhaps remove from their statement the part referring to a possible hike this year.
From the UK, we get a bunch of August data. We have the GDP, the trade balance, as well as industrial and manufacturing production for the month. That said, although the pound may instantly respond to any disappointment or positive surprise in these releases, its faith remains hostage to UK politics in our view.
Last week, UK PM Boris Johnson made a Brexit offer to the EU, proposing an all-island regulatory zone in Ireland to cover all traded goods, with comments from several EU officials suggesting that Johnson’s plan will hit a dead end. Johnson has been consistently holding the view that the UK will leave the EU by October 31st, with or without a deal, but also said that he will not break the law requiring him to ask for a new extension if a deal is not reached by October 19th. With the clock ticking towards the current deadline, it will be interesting to see how he could do that. One way is to find common ground with the EU by October 19th, something that appears to be a hard task at the moment. Another way according to media reports, is to ask for a delay post-October 19th, but also pressure several EU members into refusing the extension.
From the US, we have the CPIs for September. The headline CPI rate is forecast to have ticked up to +1.8% yoy from +1.7%, while the core one is expected to have remained unchanged at +2.4%. That said, bearing in mind that both the PPI rates are forecast to have held steady, if this is the case, we would expect the headline CPI rate to have remained untouched as well.
Despite the latest projections of the FOMC suggesting no more cuts this year, investors remain well convinced that officials will act again, especially after the big disappointment in the ISM manufacturing PMI. According to the Fed funds futures, they see a 84% chance for the Committee to push again the cut button at the upcoming gathering, and a negative surprise in the CPIs could drive that percentage even higher.
Finally, on Friday, apart from the negotiations in Washington between China and the US, investors are also likely to pay attention to Canada’s employment report for September. The unemployment rate is forecast to have remained unchanged at 5.7%, while the net change in employment is forecast to have slowed to 7.5k from 81.1k. At its latest meeting, the BoC kept interest rates unchanged at +1.75%, reiterating that the current degree of monetary policy stimulus remains appropriate and thereby, staying among the very few major central banks that have not turned their eyes to the cut button yet. That said, following the slowdown in both the headline and core CPIs for August, a soft employment report may raise speculation that this central bank could soon join the easing chorus.
As for the rest of Friday’s data, we get Germany’s final CPIs for September and the preliminary UoM consumer sentiment index for October. As it is usually the case, the German prints are expected to confirm their preliminary estimates, while the UoM index is forecast to have declined to 92.0 from 93.2.
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