An anxious end to Q3 included ongoing polarization in Washington over the Supreme Court, continued tariff risks, stalled NAFTA negotiations, and now a reemergence of jitters over Italy’s politicized budget. About the only thing that went according to plan was the FOMC’s hike, though the removal of “accommodative stance” was initially misdiagnosed as dovish. Stakes have been raised for the European Union again after Italy’s budget machinations threatened to blow out its deficit/GDP ratio to 2.4%, without doing much to address Italy’s long-term structural problems and sluggish growth. Coming at a time when ECB is preparing to retract QE and ultimately tighten policy for the benefit of the union on aggregate, this could complicate the ECB’s plans and timelines. At the same time, political fission elsewhere makes for a less cohesive atmosphere. Germany’s Merkel appears to be losing her grip on her party and coalition. UK PM May also continues to face backlash against her Brexit plan and could face another election and/or referendum. Additionally, on the monetary policy front this week, RBA is expected to hold rates steady.
United States: In the US, this week’s calendar will include readings on employment, trade, construction spending and the PMIs, as well as vehicle sales, factory orders and consumer credit. Focus will be on payrolls, with September gains in employment expected to be restrained by the impact of Hurricane Florence. In contrast to Trump’s efforts, the trade deficit is expected to widen. The ISM and the ISM-NMI should adjust down slightly from strong levels. Construction spending should rise as should factory orders, and vehicle sales are expected to rise after declining in the prior two months. Consumer credit should post another monthly gain, boosted by non-revolving credit.
On Friday, September payrolls should rise 195k (190k private payroll increase), with the unemployment rate slipping to 3.8% from 3.9% in August. Overall, the labor market remains strong and we see average payroll growth of 209k this year, up from 182k in 2017. Early this week, (Monday) the manufacturing PMI is estimated to moderate in September to a reading of 59.0, down from a 14-year high of 61.4 in August, while construction spending may rise 0.5% in August, up from a tepid 0.1% reading in July that followed a decline of 0.8% in June. Vehicle sales appear poised to bounce to the 16.9 mln area in September (Tuesday) from lean rates of 16.7 mln in July and 16.6 mln in August. ADP private jobs surveys are due (Wednesday), with the latter forecast to increase 210k in September from 163k. The NMI-PMI should slip to 58.0 in September (Wednesday) from 58.5. Initial jobless claims are estimated to fall 5k to 209k in the week ended September 29 (Thursday), following a 214k reading in the week of September 22 and factory orders (Thursday) are set to rise 2.3% in August, more than reversing a 0.8% July drop. In addition to payrolls (Friday) the trade deficit is expected to widen to in August (Friday), while consumer credit is expected to rise (Friday). Fed Chair Powell will be making a couple of appearances this week before a NABE meeting (Tuesday) and at a roundtable event sponsored by the Aspen Institute (Wednesday).
Canada: NAFTA negotiations will remain a center of attention. Meanwhile, the calendar is back-loaded this week with August trade and September employment due (Friday). Regarding PMIs, the September Ivey PMI (Thursday) and the September Markit PMI (Monday) will both come out this week. The unemployment rate is expected to ease to 5.9% in September (Friday) after the pop to 6.0% in August from a 40-year low 5.8% in July. The trade deficit (Friday) is expected to widen.
Europe: Risk aversion has flared up again as Italy’s populists forced the hand of Finance Minister Tria and presented a budget plan that will push out the deficit to GDP ratio to 2.4%. None of the measures financed with the spending plans are likely to address Italy’s underlying structural problems and lift long term growth potential lastingly. Last time, ECB stepped in with a massive injection of liquidity, but this time they don’t have much wiggle room left, especially as current monetary policy already looks too accommodative for an overall robust economy. Final September PMI readings are not expected to hold major surprises (Monday), and neither should the services reading (Wednesday) and the Composite (Wednesday). In real data, German August manufacturing orders (Friday) are expected to have risen, but mainly as a rebound after the slump in July. German (Monday) and Eurozone retail sales (Wednesday) are seen rising as ongoing improvements on labor markets and slowly rising wages continue to underpin consumption trends. The Eurozone August unemployment rate (Monday) is seen falling as the PMIs suggest that at least so far job creation is continuing. The calendar also has Eurozone and German PPI inflation and there is supply from France and Spain on Thursday.
Switzerland: The calendar this week includes the September readings for both manufacturing PMI (Monday) and CPI inflation (Friday).
UK: The political stalemate over Brexit looks increasingly insoluble, and it may ultimately lead to a new referendum or general election. The central problem is that the Irish border backstop solution that guarantees a free-flowing border between Ireland and Northern Ireland in whatever Brexit scenario, is seen as a political imperative on both sides of the border. The need for a backstop, to recap, is agreed by both the EU and UK, but there are fundamental differences in how to achieve it. The annual conference of the Conservative Party takes place this week and the odds of a breakthrough are low at this juncture, which should leave the Pound trading in turbulent airs. The data calendar this week is highlighted by the September PMI (Monday), which is likely to paint a picture of moderate expansion while highlighting, once again, curtailed business investment as a consequence of Brexit-related uncertainties. The services PMI (Wednesday) is expected to dip slightly. Monthly lending and money supply data are also up (Monday).
Japan: The September Nikkei/Markit manufacturing PMI (Tuesday) is penciled in sliding after rising in August. September consumer confidence is also due Tuesday. The September services PMI is set for Wednesday release, while August personal income and PCE (Friday) are also expected to come out.
Australia: The focus this week is on the Reserve Bank of Australia’s meeting (Tuesday), which is widely expected to result in no change to the current 1.50% setting for the cash rate. Economic data features August trade (Thursday), expected to show a narrowing in the surplus. Retail sales (Friday) are expected to tick higher in August after the flat reading in July. Building approvals (Wednesday) are projected to rebound after the drop in July.
New Zealand: A sparse calendar this week has September house prices (Wednesday) and the GDT Price Index (Tuesday).
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Dr Nektarios Michail
Market Analyst
HotForex
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