We are in “extraordinary times” Fed Chairman Powell told NABE, surely understating the current environment where economics, monetary policy, and politics are making a very volatile mix. Indeed, these forces collided last week with the strong September jobs and ISM reports, hawkish Fedspeak, and ongoing trade tensions, leaving in their wake sharply higher bond yields which in turn weighed heavily on stocks. It looks as though the genie is out of the bag in terms of interest rates, and it will be up to equities to manage this new reality.
United States: Attention will now turn to this week’s heavy slate of auctions, along with a number of inflation reports on the economic calendar, and a bevy of Fedspeak. Inflation reports dominate the economic calendar. September CPI (Thursday) is expected to post increases of 0.2% for both the headline and core, after respective gains of 0.2% and 0.1% in August. Services prices are estimated to rise 0.3%. As-expected data would slow the y/y rate of headline CPI to 2.4%, from August’s 2.7%. September import prices (Friday) are estimated to bounce 0.2%, following declines in the prior two months. There should be a boost from petroleum prices to overall import prices, but ex-petroleum prices are likely to decline 0.2%. Meanwhile, export prices should fall 0.2%, after declining in August and July. As-expected readings would result in a slowing in 12-month measure to 3.0% y/y from 3.7% y/y for import prices and 2.5% y/y from 3.6% y/y for export prices. Also, PPI (Wednesday) is expected to rise 0.1% in September, following a 0.1% decline in August, while core prices should post a 0.2% gain.
Other data this week includes the preliminary October Michigan sentiment reading (Friday) which should be little-changed at 100.0 from 100.1 in September, and close to the 14-year high of 101.4 in March. There’s the NFIB small business optimism index (Tuesday), and the Treasury budget for September to close fiscal 2018. A number of Fedspeakers will have the opportunity to discuss their outlooks this week in the aftermath of the jobs report.
Canada: Canada’s holiday shortened week is thin on data. September housing starts (Tuesday) is the sole top tier release. It is expected to rise to a 210k pace in September from 201.0k in August. Building permit values (Wednesday) are seen falling 1.0% in August after the 0.1% dip in July. The new housing price index (Thursday) is projected to improve 0.1% in August after the 0.1% gain in July.
Europe: Long yields continued to extend higher last week amid robust US data, and despite growing signs that downside risks to growth and geopolitical trade jitters are becoming reality. Meanwhile, the data calendar this week started with German industrial production for August which declined -0.3% m/m. Expectations had been for at least a modest rebound after production fell in June and July but August orders came in much stronger than anticipated. Instead, production declined for a 3rd consecutive month, with manufacturing production falling -0.1% m/m after -1.9% m/m in July. France and Italy also release August production numbers (Wednesday) and overall Eurozone production numbers (Friday).
The rest of the calendar mainly focuses on final inflation readings, where no major surprises are expected, and see the German HICP rate (Friday) confirmed at 2.2% y/y and the French rate (Thursday) also at 2.2% y/y. This should leave the overall Eurozone HICP rate (due October 17) on course to be confirmed at 2.1% y/y, above the ECB’s 2% limit for price stability, but mainly due to sharply higher energy price inflation, which gives Draghi room to pursue a very gradual reduction of stimulus amid ongoing political jitters and market volatility.
UK: Brexit remains front and center as the UK and EU work toward producing a deal by the October 17 summit in Brussels. Sterling was buoyed in the latter part of last week by signs of progress, with EU negotiators cited by Reuters reporting that a deal is “very close.” Irish PM Varadkar also said that there “is a good opportunity to clinch a deal over the next couple of weeks.” The British government is pursuing an evolving version of its plan (aka the Chequers plan), details of which remain unclear but include what is being touted as an “All-UK” customs union with the EU as a means to circumnavigate the Irish border problem. Ireland, and thereby the EU, has demanded an Irish border backstop solution that guarantees a free-flowing border between Ireland and Northern Ireland in whatever Brexit scenario. The need for a backstop is agreed by the UK, though a workable solution that is acceptable to all sides has yet to emerge. Any deal will be subject to the ratification of the EU 27 states and a parliamentary vote in the UK, where it will by no means have guaranteed passage given the marked differences in the factions of the fragile Tory-DUP governing alliance, and between the parties.
The data calendar this week is highlighted by August industrial production and trade figures (Wednesday). The September BRC retail sales report (Tuesday) and various house price indicators are also due. The industrial production is anticipated at 0.1% m/m and 1.0% growth. The data are not likely to impact markets given the overriding focus on the Brexit negotiation process, which is now very much at the crucial stage.
Japan: Japan will be closed Monday for Health-Sports Day. The economic calendar kicks off on Wednesday with August machinery orders, which are expected to fall 5.0% m/m from the prior 11.0% rise. The August current account surplus (Tuesday) is seen narrowing to JPY 1,800 bln from 2,010 bln. September PPI (Thursday) is pencilled in at a 2.8% y/y rate from 3.0%. September bank loans figures are due Thursday as well. Friday brings the August tertiary industry index, which is forecast at up 0.2% from 0.1% previously.
China: The September services PMI (Monday) is expected to slip to 51.3 from 51.5. September loan growth and new Yuan loans are due Wednesday, with the latter seen rising CNY 1,300 bln. The September trade report (Friday) will be scrutinized for trade implication.
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Andria Pichidi
Market Analyst
HotForex
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