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by Charalambos Pissouros

Weekly Outlook: Sep 09 – Sep 13: ECB Decision, UK MPs to Vote on Election, US CPIs Also in Focus

This week, the spotlight is likely to turn to the ECB monetary policy decision, with investors eager to see whether the Bank will just cut its deposit rate by 10bps, or whether it will introduce a stronger stimulus package. From the UK, we get the industrial and manufacturing production prints, as well as the monthly GDP, all for July, but again data are likely to be overshadowed by politics as UK PM Boris Johnson may table another motion with regards to new elections. In the US, CPIs for August are coming out, but they are unlikely to alter much market expectations with regards to a 25bps cut next week.

On Monday, during the European morning, the UK industrial and manufacturing production prints, as well as the monthly GDP rate, all for July. Both IP and MP are expected to have declined 0.1%mom, after sliding 0.1% and 0.2% respectively in June. Something like that would drive the IP yoy rate down to -1.1% from -0.6%, while the MP yearly rate is forecast to have risen to -1.1% from -1.4%. That said, given that the manufacturing PMI for the month held steady at 48.0, we see the risks surrounding the MP forecast as tilted to the downside. With regards to the monthly GDP rate, no forecast is currently available. The nation’s trade balance for July is also coming out, with the forecast suggesting a widening deficit.

UK Industrial production vs manufacturing PMI

That said, once again British data are very likely to be overshadowed by Brexit developments. On Friday, the House of Lords has approved the bill that requires the government to seek a new Brexit delay, while it is expected to officially pass into law today. Also, UK PM Boris Johnson may table another motion with regards to new elections, and the big question is whether the Labour will back it this time. Remember that their Leader, Jeremy Corbyn, said that he will not support a new election until the threat of a no-deal Brexit has been taken off the table. However, even with the extension bill ready to take a legislative form, there is still division within the party over supporting any election bit before a delay has been secured with the EU.

On Tuesday, during the Asian morning, we get Australia’s NAB business confidence index for August, as well as China’s CPI and PPI for the same month. There is no forecast available for the NAB business confidence index, while both China’s CPI and PPI rates are expected to have declined. The CPI rate is anticipated to have slid to +2.6% yoy from +2.8%, while the PPI one is forecast to have fallen to -0.9% yoy from -0.3%.

During the European morning, we get Norway’s CPIs for August. The headline rate is expected to have ticked down to +1.8% yoy from +1.9% in July, while the core rate is anticipated to have remained unchanged at +2.2% yoy. The headline rate would be above the Norges Bank’s forecast for the month, which is at +1.6% yoy, but the core rate would be slightly below its +2.3% yoy projection. That said, it would still be above the Bank’s inflation aim of 2.0%, and thus, it may allow Norwegian policymakers to reiterate their intention to increase rates further this year.

Norway CPIs inflation

In the UK, the employment report for July is due to be released. The unemployment rate is expected to have held steady at 3.9%, while average weekly earnings including bonuses are expected to have risen 3.7% yoy, the same pace as in June. The excluding-bonuses rate is anticipated to have ticked down to +3.8% from +3.9%. According to the IHS Markit/KPMG & REC Report on Jobs for the month, both permanent starting salaries and temporary pay rose at a weaker pace, with starting salaries seeing the softest rate since April 2017. In our view, this supports the case for slower earnings, at least without the bonuses in the calculation.

UK real wage growth

From Canada, we get housing starts for August and building permits for July. Housing starts are expected to have declined to 204.5k from 222.0k in July, while building permits are anticipated to have rebounded 1.5% mom after falling 3.7% in June.

On Wednesday, it’s the turn of Sweden to release its inflation data for August. Both the CPI and CPIF rates are expected to have remained unchanged at +1.7% yoy and +1.5% yoy respectively. As always, we will pay more attention to the core CPIF rate, which pulled back to +1.7% yoy in July from +1.9% in June.

Sweden CPIs inflation

At its prior meeting, last week, the world’s oldest central bank decided to keep interest rates unchanged and kept 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 underlying 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. However, the next Riksbank meeting is scheduled for October 24th and up until then, we will get the September inflation data. Thus, we prefer to wait for the September set before we evaluate better what policymakers may decide to do at their October gathering.

From the US, the PPIs for August are coming out, just a day ahead of the CPIs. Both the headline and core rates are expected to have ticked up to +1.8% yoy and +2.2% yoy from +1.7% and 2.1% respectively, which could raise speculation that the CPIs may move in a similar fashion.

On Thursday, all eyes will turn to the ECB monetary policy decision. At their latest meeting, ECB policymakers officially opened the door to lower rates and added that additional measures, such as a potential QE restart may also be introduced.

ECB interest rates

Inflation data for August showed that both the headline and core CPI rates remained unchanged at +1.0% yoy and +0.9% yoy respectively, well below the ECB’s objective of “below, but close to 2%”. Coming on top of comments by ECB member Olli Rehn, who said that “it is important that we come up with a significant and impactful policy package”, this data enhances the case that ECB may indeed proceed with a strong stimulus package this week. Having said that though, two hawkish members have lately raised some doubts on that front. Executive Board member Sabine Lautenschläger said “it is much too early for a huge package”, while ECB member Klass Knot added that there is no need for resuming QE now. According to Eurozone money markets, investors are pricing in more than a 10bps cut in the deposit rate for this gathering. Actually, they see the rate nearly 15bps lower. Therefore, given that a 10bps cut is nearly a done deal for the financial world, all the attention is likely to fall on whether the Bank will decide to introduce something beyond that and if so, what form any additional measures will take.

As for Thursday’s data, during the European morning, we get Germany’s final CPIs for August, which are expected to confirm their preliminary numbers, and Eurozone’s industrial production for July, which is forecast to have slid 0.1% mom, after declining 1.6% in June.

Later in the day, we get the US CPIs for August. The headline rate is anticipated to have remained unchanged at +1.8% yoy, while the core one is forecast to have ticked up to +2.3% yoy from +2.2%. Bearing in mind that both the PPI rates are expected to have fractionally risen, we see the risks surrounding the headline forecast as tilted somewhat to the upside.

US CPIs inflation

In any case, although underlying inflation is expected to move further above the FOMC’s inflation objective of 2.0%, we doubt that it could alter much expectations around a 25bps cut by the Fed next week. On Friday, Fed Chair Jerome Powell repeated that they would “act as appropriate” to keep economic expansion on track, comments suggesting that he is indeed leaning towards September cut. That said, combined with the latest optimism surrounding the US-China trade saga as well as the better-than-expected wage growth for August, an uptick in the underlying inflation rate may allow investors to price out some of the basis points they expect to be cut after the September gathering. According to the Fed funds futures, apart from a September quarter-point cut, investors anticipate another one by year end.

US Fed funds futures market interest rate expectations

Finally, on Friday, Chinese markets will be closed due to the Mid-Autumn festival.

From Europe, we get the wages and labor cost yoy rates, but no forecast is currently available. In the US, both the headline and core retail sales rates for August are expected to have declined to +0.2% mom and +0.1% mom, from +0.7% and +1.0% respectively. The preliminary UoM consumer sentiment index for September is also coming out and it is anticipated to have risen to 90.7 from 89.8.

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