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by Charalambos Pissouros

Weekly Outlook: Sep 02 – Sep 06: RBA, BoC and Riksbank Meetings; Brexit and NFPs also in Focus

We have a very busy week ahead of us, with three central banks deciding on interest rates: the RBA, the BoC and the Riksbank. All three are expected to keep their policy unchanged, so investors will dig into the statements for clues with regards to their future plans. In the UK, focus will fall on Brexit and MPs’ return from their summer recess. Following PM Johnson’s decision to suspend Parliament from mid-September, it would be interesting to see what their actions will be. The US and Canadian jobs data for August are also due to be released.

On Monday, markets in Canada and the US will be closed in celebration of the Labor Day.

Elsewhere, we get the final manufacturing PMIs for August from several European nations and the Eurozone as a whole, but as it is the case most of the times, the final prints are expected to confirm their preliminary estimates.

We get the manufacturing PMI for August from the UK as well, and the forecast suggests that the index rose somewhat but remained within the contractionary territory (48.4 from 48.0). Then on Tuesday, we get the construction index, while on Wednesday, the services print is due to be released. The construction index is forecast to have increased to 45.5 from 45.3, while the services one is anticipated to have slid to 51.0 from 51.4.

Having said all that though, we believe that UK data may be overshadowed by UK politics once again. Following PM Johnson’s decision to suspend Parliament from mid-September up and until October 14th, when the Queen’s speech is scheduled, all lights are likely to fall on MPs’ return from their summer recess on Tuesday. Last week, opposition parties agreed to work together in an attempt to stop a no-deal outcome, with Labour Leader Jeremy Corbyn softening his stance over a no-confidence vote and a caretaker government. Nevertheless, following Johnson’s decision, MPs may indeed now try to oust him. Thus, it would be interesting to see whether they will find common ground as early as this week on how to stop a no-deal Brexit, either by legislation or by a no-confidence vote.

On Tuesday, during the Asian morning, the RBA will announce its monetary policy decision. At its previous meeting, the Bank kept interest rates unchanged at +1.00% and noted that they will continue to monitor developments in the labour market closely and ease policy further “if needed” to support sustainable growth and achieve their inflation target. That view was confirmed by the minutes of that meeting, which also revealed that members reviewed the experience of other advanced economies with unconventional easing measures, such as negative rates and buying government bonds. They also noted that a package of measures tended to be more effective than measures implemented in isolation.

RBA interest rates

In our view, the overall message remained more or less the same as in July. We believe that the “if needed” part suggests that policymakers may not be in a rush to cut rates at this gathering and rather wait for a later one. Indeed, this appears to be the market’s view as well. According to the ASX 30-day interbank cash rate futures implied yield curve, there is only a 10% chance for a September move, while the probability for cutting in October stands at 72%. A 25bps reduction is more than fully priced in for November. In other words, investors expect the RBA to cut rates in October or November.

ASX 30-day interbank cash rate futures implied yield curve

Thus, if the Bank decides to stand pat as expected, we will dig into the statement for clues as to whether indeed officials plan to act at one of the upcoming gatherings, especially after the latest round of escalating tensions between China and the US. It would be also interesting to see whether the discussion of unconventional measures will take a spot in the meeting statement.

As for Tuesday’s data, during the Asian morning, Australia’s retail sales are expected to have slowed to +0.2% mom in July from +0.4% in June, while later in the day, Switzerland’s CPI is forecast to have ticked down to +0.2% yoy from +0.3%. From the US, we get the final Markit manufacturing PMI, which is expected to confirm its initial estimate of 49.9, as well as the ISM manufacturing index, which is forecast to have slid to 51.0 from 51.2.

On Wednesday, the central bank torch will be passed to the BoC. At their latest meeting, BoC policymakers kept interest rates unchanged and noted that the degree of accommodation provided by the current rate remains appropriate, staying among the very few major central banks that have not turned their eyes to the cut button, although they appeared concerned with regards to the US-China trade conflict.

The last employment report disappointed, with the unemployment rate rising to 5.7% in July from 5.5% in June, and the employment change pointing to a 24.2k job loss, but inflation data for the month came in better than expected. What’s more, the annualized GDP rate for Q2 surged to 3.7% from 0.5% in Q1, exceeding estimates of a still-decent rally to +3.0%.

Canada GDP qoq annualized rate

So, seen in isolation, the data suggests that Canadian policymakers could maintain their neutral stance for a while more, but the escalating tensions between China and the US raise doubts on that front and this is evident by Canada’s OIS (Overnight Index Swaps), according to which market participants see a 72% chance for a rate cut by the end of the year. Thus, we will dig into the statement to see how worried policymakers are with regards to the US-China sequel, and whether they have already started considering the case of a rate decrease.

With regards to the economic indicators, during the Asian morning, Australia’s GDP for Q2 is due to be released. Expectations are for the qoq rate to have ticked up to +0.5% from +0.4%, something that will drive the yoy rate down to +1.4% from +1.8%, which would be below the RBA’s own projection for the quarter. Something like that could prompt market participants to increase their bets with regards to an RBA cut in the upcoming months, especially if the Bank signals on Tuesday that it remains willing to do so.

During the rest of the day, we have the final services and composite PMIs for August from the European nations of which we get the manufacturing prints on Monday. As it is usually the case, the final prints are anticipated to be the same as the preliminary ones. Eurozone’s retail sales for July and Canada’s trade balance for the month are also coming out.

On Thursday, we have another central bank deciding on interest rates, and this is Sweden’s Riksbank. At its latest meeting, in early July, the world’s oldest central bank decided to keep interest rates unchanged at -0.25%, and maintained the view that the repo rate “will be increased again towards the end of the year or at the beginning of next year.”

Sweden Riksbank interest rates

Latest CPI data showed that both the CPI and CPIF rates slowed less than expected. That said, we prefer to focus more on the core CPIF rate, which pulled back to +1.7% yoy from +1.9%. What’s more, GDP for Q2 slowed to +1.4% yoy from +2.1%, which is below the Bank’s latest projection for the year. Therefore, the aforementioned softness in data, combined with the fact that the ECB officially opened the door for a stimulus package to be introduced at its next meeting, may prompt Swedish policymakers to appear more dovish than in July, perhaps by pushing back their forward guidance and taking off the table the “end of the year” part.

From Switzerland, we get GDP data for Q2. Expectations are for a slowdown to +0.2% qoq from +0.6%, something that will bring the yoy rate down to +0.9% from +1.7%. Combined with an inflation rate that gets closer to zero, as well as a highly valued franc due to the heightened global uncertainty, a slowdown in economic growth would allow SNB policymakers to keep their monetary policy ultra-loose, and stay willing to intervene in the FX market when needed in order to help reduce the attractiveness of their currency. Record levels of the SNB’s sight deposits suggest that the Bank has been already stepping up its intervention efforts.

In the US, we get the ADP employment report for August. Expectations are for the private sector to have gained 148k jobs, slightly less than July’s 156k. This could raise speculation that the NFP print, due out on Friday, may also come in slightly below its July number of 164k. That said, we repeat once again that, even though the ADP is the only major gauge we have for the non-farm payrolls, the correlation between the two time-series at the time of the release (no revisions are considered) has been low in recent years. Taking into account data from January 2011, that correlation now stands at 0.45%. The final Markit services and composite PMIs for August, and the ISM non-manufacturing index for the month are also coming out.

ADP vs NFP US employment data

Finally, on Friday, the spotlight is likely to turn to the US employment report for August. Expectations are for non-farm payrolls to have increased 159k, less than July’s 164k, while the unemployment rate is anticipated to have remained unchanged at 3.7%, just a tick above its 49.5-year low. Average hourly earnings are forecast to have risen +0.3% mom, the same pace as in July, which barring any deviations to the prints, could keep the yoy rate unchanged at +3.2%, as the monthly print of August 2018 that will drop out of the yearly calculation was also +0.3%.

Average hourly earnings vs core CPI

Although the forecasts point to a decent report, we doubt that this data set could alter expectations with regards to a rate cut by the Fed at its upcoming gathering. It appears that what drives the Fed’s actions recently is not domestic data. Seen in isolation, we don’t think they paint such a bad picture that requires consecutive cuts. In our view, the main driver is the US-China trade war, and as long as it remains unresolved, concerns with regards to the performance of the economy may continue to rise, and thus, the Fed could cut rates even more in order to prevent a downturn.

At the Jackson Hole, Fed Chair Powell said that the Fed would act as appropriate” to keep economic expansion on track, comments suggesting that he is indeed leaning towards a September cut, while yesterday, both the US and China proceeded with their planned new round of tariffs. Despite last week’s relatively optimistic remarks with regards to trade talks, further escalation cannot be ruled out yet in our view, which means that the risks of an economic downturn are far from dissipated.

We get employment data for August from Canada as well. The unemployment rate is forecast to have held steady at 5.7%, while the net change in employment is expected to show that the economy gained 15k jobs after losing 24.2k in July. Overall, we don’t expect these numbers to prove game changers with regards to expectations around the BoC’s future policy plans. After all, investors will get clues and hints on that front from Wednesday’s BoC decision, and thus, they will be able to adjust their bets accordingly ahead of the employment report.

Canada unemployment rate

Apart from the US and Canadian jobs reports, we also have Eurozone’s final GDP for Q2 on the agenda, which is expected to confirm that the Euro-area economy slowed to +0.2% qoq from +0.4% in Q1.

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