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by Charalambos Pissouros

Weekly Outlook: Sep 30 – Oct 04: RBA Decision, Eurozone CPIs and US NFPs in Focus

This week, the central bank torch will be passed to the RBA, with the market assigning a 74% chance for a rate cut. Thus, if indeed policymakers decide to cut rates, focus will quickly turn on whether they will stay willing to deliver more cuts in the months to come. From the Eurozone, we get the preliminary CPIs for September, where another set of soft prints may increase the need for more monetary and fiscal support. In the US, the employment data for the month are due to be released, where a decent report may prompt investors to push somewhat back their bets with regards to another Fed cut this year.

On Monday, during the European morning, we get the final UK GDP for Q2, which is expected to confirm that the British economy contracted 0.2% qoq in the three months to June. That said, we expect the release to pass largely unnoticed as we already have data pointing to how the economy entered the third quarter. The monthly GDP rate for July rose to +0.3% mom from 0.0% mom, easing fears with regards to a technical recession.

GBP traders may keep most of their attention on the political scene. On Sunday, the Conservative Party Conference has begun, and it will last until Wednesday. Last week, UK PM Boris Johnson said that he will respect the law requiring him to seek for a new delay, but he will take the UK out of the EU on October 31st. The only way this could happen is for him to reach consensus with EU officials ahead of October 19th, something we see as a hard task at the moment. Thus, we will scan the headlines surrounding he Conference for more clarity on how the PM intends to move forward.

From Germany, we get the preliminary CPIs for September. The CPI rate is forecast to have ticked down to +1.3% from +1.4%, while the HICP rate is expected to have remained unchanged at +1.0% yoy. A potential downtick in the CPI rate may raise speculation that Eurozone’s headline inflation rate, due out on Tuesday, may also move somewhat lower. The German retail sales for August and the nation’s unemployment rate for September are also coming out. Retail sales are expected to have rebounded 0.5% mom after sliding 2.2% in July, while the unemployment rate is forecast to have remained unchanged at 5.0%. We will also get the unemployment rate for September from the Eurozone as a whole, and the consensus is for the rate to have held steady at 7.5%.

On Tuesday, during the Asian morning, the RBA will release its monetary policy decision. At their latest policy meeting, Australian policymakers decided to keep interest rates unchanged at the record low of +1.00%, and reiterated that they will continue to monitor developments, including in the labour market, and ease monetary policy further “if needed”.

ASX 30-day interbank cash rate futures yield curve

The “if needed” part suggested that officials may prefer to wait for a while more before pushing again the cut button and not rush into acting at this week’s gathering. However, since then, Australia’s employment report for August showed that the unemployment rate ticked up to 5.3% from 5.2%, well above the 4.5% mark which the Bank expects to start generating inflationary pressures. This prompted investors to reconsider the chances for an October cut. According to the ASX 30-day interbank cash rate futures implied yield curve, the probability for a 25bps reduction at this meeting currently stands at 74%. Thus, if policymakers decide to lower interest rates this week, focus will quickly turn on whether they will stay willing to cut more in the months to come.

Chinese markets will be closed and stay closed for the rest of the week in celebration of the National Day. From Japan, we get the Tankan survey for Q3, with the Large Manufacturers index expected to have declined to 2 from 7, and the Large Non-manufacturers one anticipated to have slid to 20 from 23. The nation’s employment data for August are also due to be released. The unemployment rate is expected to have ticked up to 2.3% from 2.2%, while the jobs-to-applications ratio is forecast to have ticked down to 1.58 from 1.59.

During the European day, we get preliminary inflation data for September from the Eurozone. The headline rate is forecast to have remained unchanged at +1.0% yoy, while the core one is anticipated to have risen to +1.0% from +0.9%. That said, bearing in mind that the German CPI is forecast to have slowed somewhat, we see the case, at least for the bloc’s headline rate, to have moved lower as well.

German vs Eurozone CPIs inflation

At its latest policy meeting, the ECB cut its deposit rate by 10bps and decided to restart its QE program, with President Draghi adding that the Governing Council “continues to stand ready to adjust all of its instruments as appropriate to ensure that inflation moves towards its aim in a sustained manner.” However, although the Bank remained ready to ease further if needed, at the press conference, Drahgi also stressed the need for governments with fiscal space to act in an effective and timely manner. “Now it’s high time I think for the fiscal policy to take charge,” the President said.

Thus, following the disappointing preliminary PMIs for the month, stubbornly low inflation may not only prompt market participants to bring forth their bets with regards to another 10bps rate cut, but it may increase further the need for governments to provide fiscal support.  As far as another cut by the ECB is concerned, according to Eurozone’s money markets, investors are fully pricing in one to be delivered in March. The bloc’s final manufacturing PMI for September is also coming out, but as it is always the case, it is expected to confirm its preliminary estimate.

From the UK, we get the manufacturing PMI for September. On Wednesday, the construction index is due to be released, while on Thursday, we have the services print. The manufacturing index is forecast to have declined further into the contractionary territory, to 47.0 from 47.4, while the construction one is forecast to have ticked down to 44.9 from 45.0. The more-important services print is expected to have declined to 50.3 from 50.6.

From the US, we get the ISM manufacturing PMI for September, while from Canada, we have the monthly GDP for July. The ISM index is expected to have returned within the expansionary territory (50.1 from 49.1), while Canada’s GDP is forecast to have slowed to +0.1% mom from +0.2%.

On Wednesday, we get inflation data from Switzerland, with the yoy CPI rate anticipated to have stuck at +0.3%. At its prior gathering, the SNB kept its monetary policy untouched and provided no signals with regards to additional easing, a decision that may have disappointed those who, following the ECB’s decision to add more stimulus, have been expecting the SNB to also cut interest rates, or at least signal willingness to do in the months to come. The Bank just reiterated that it remains willing to intervene in the FX market as necessary, and that the franc remains highly valued. That said, another very low inflation print may revive some speculation that Swiss policymakers will eventually have to loosen further their policy.

From the US, we get the ADP employment report for September. Expectations are for the private sector to have added 140k jobs, less than the 195k gain in August. This would raise speculation that the NFP print, due out on Friday, may also come below its prior print. However, we repeat once again that the ADP is far from a reliable predictor for the NFP number. Even last time, when the ADP rose to 195k from 142k, the NFP slid to 130k from 159k. Taking into account at-the-time-of-the-release data (no revisions are considered) from January 2011, the correlation between the two time-series stands at 0.45%.

ADP vs NFP employment

On Thursday, apart from the Chinese markets, the German ones will be closed as well due to the Unification Day. As for the data, during the Asian trading, we get Australia’s trade balance for August, which is expected to show that the nation’s surplus has narrowed somewhat. Later, during the EU session, Eurozone’s final services and composite PMIs for September are coming out, as well as the UK services index, already mentioned above. We get more September PMIs from the US. The final Markit services and composite indices are forecast to confirm their preliminary readings, while the ISM non-manufacturing print is expected to have declined to 55.0 from 56.4.

Finally, on Friday, the spotlight is likely to turn to the US employment report for September. Nonfarm payrolls are expected to have increased 145k during the month, slightly more than August’s 130k, while the unemployment rate is expected to have held steady at 3.7%, a tick above its 49.5 – year low of 3.6%. Average hourly earnings are expected to have slowed to +0.3% mom from +0.4%, which barring any major deviations to the prior monthly prints, is likely to keep the yoy rate unchanged at +3.2%.

Earnings vs core CPI

Overall, the forecasts point to another decent report consistent with further tightening in the labor market, which may add to the case that no more Fed cuts are needed this year. Remember that at its latest meeting, the Committee decided to lower interest rates by 25bps, but 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.

Fed funds futures market vs FOMC interest rates expectations

As for our view, although a decent NFP report may encourage market participants to push back their bets with regards to another cut this year, a lot on that front will depend on how the US-China trade sequel unfolds. If tensions between the two largest economies re-escalate, the Fed may eventually be forced to cut again in the months to come.

As for the rest of Friday’s data, the US and Canada trade balances are due to be released. The US deficit is expected to have widened somewhat, while the Canadian one is anticipated to have slightly narrowed. Canada’s Ivey PMI for September is also coming out, but no forecast is currently available.

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