This is another big data week that could help determine whether the Fed needs to be even more aggressive. Data last week showed the U.S. economy is proving to be more resilient and inflation more persistent than previously anticipated, which should keep the Fed in tightening mode. The price action in the FX market last week was a bit strange and may have been impacted by month- and quarter-end rebalancing flows. This week should give a cleaner read of the markets and we expect the dollar to resume its broad-based climb.
AMERICAS
September jobs data Friday is of course the data highlight. Consensus sees 250k vs. 315k inn August, with the unemployment rate steady at 3.7% and average hourly earnings falling a tick to 5.1% y/y. Ahead of that, JOLTS job openings will be reported Tuesday and are expected at 11.075 mln vs 11.239 mln in July. ADP private sector jobs estimate will be reported Wednesday and are expected at 200k vs. 132k in August. August Challenger job cuts and weekly jobless claims will be reported Thursday. Initial claims are expected at 205k vs. 193k previously, while continuing claims are expected at 1.380 mln vs. 1.347 mln previously. The recent drop in the claims data point to continued resilience in the labor market.
We also get important survey readings. ISM manufacturing will be reported Monday. Headline is expected at 52.1 vs. 52.8 in August. Employment is expected at 53.0 vs. 54.2 in August while prices paid is expected at 52.0 vs. 52.2 in August. ISM services PMI will be reported Wednesday, with headline expected at 56.0 vs. 56.9 in August. Last week, Chicago PMI came in weaker than expected at 45.7 vs. 52.2 in August and was the lowest since June 2020.
This is another heavy week of Fed speakers. Bostic and Williams speak Monday. Logan, Williams, Mester, Jefferson, and Daly speak Tuesday. Bostic speaks again Wednesday. Evans, Cook, Waller, and Mester speak Thursday. Williams and Bostic speak Friday. Fed officials last week remained largely hawkish, though some (Brainard and Daly) did express caution on the Fed moving too fast. WIRP suggests nearly 70% odds of a 75 bp hike November 2, which we think is a done deal after last week’s data. Looking ahead, the swaps market is pricing in a peak policy rate between 4.50-4.75%.
Other minor data should underscore the resilience in the U.S. economy. August construction spending (-0.3% m/m expected) and September vehicle sales (13.55 mln annualized) will be reported Monday. August factory orders will be reported Tuesday and are expected at 0.2% m/m vs. -1.0% in July. August trade data will be reported Wednesday and the deficit is expected at -$67.9 bln vs. -$70.7 bln in July. Wholesale trade sales and inventories, and consumer credit will be reported Friday.
Canada highlight is also jobs data Friday. Consensus sees 20.0k jobs added vs. -39.7k in August, while the unemployment rate is expected to remain steady at 5.4%. Ahead of that, September S&P Global manufacturing PMI will be reported Monday. August building permits and trade data will be reported Wednesday. September Ivey PMI will be reported Thursday. Bank of Canada tightening expectations fell after a batch of weak data, including August jobs. Let’s see if the labor market gets back on track. As it is, WIRP suggests 80% odds of a 50 bp hike October 26, while the swaps market is pricing in a terminal rate of 4.0% over the next 3 months.
EUROPE/MIDDLE EAST/AFRICA
The eurozone has a quiet week in terms of data. Final September manufacturing PMI will be reported Monday. Italy and Spain report for the first time and are expected at 47.5 and 49.4, respectively. Both would represent a half point drop from August. Final September services and composite PMI readings will be reported Wednesday. Here too, Italy and Spain report for the first time and their composite PMIs are expected at 48.3 and 49.7, respectively. Both would represent an even larger drop from August than manufacturing. August PPI will be reported Tuesday and is expected at 43.2% y/y vs. 37.9% in July. August retail sales will be reported Thursday and are expected at -0.4% m/m vs. 0.3% in July.
Germany reports key data for August. Trade data will be reported Wednesday. Exports are expected at 1.5% m/m vs. -2.0% in July, while imports are expected at 1.2% m/m vs. -1.5% in July. Factory orders will be reported Thursday and are expected at -0.5% m/m vs. -1.1% in July. Retail sales and IP will be reported Friday. Sales are expected at -1.0% m/m vs. 1.9% in July, while IP is expected at -0.5% m/m vs. -0.3% in July. Germany is proving to be the weak link in the eurozone and likely to drag the rest of the region into recession with it.
U.K. Prime Minister Truss shows no signs of reversing her ill-timed fiscal plan. That said, it appears Truss is preparing to throw Chancellor Kwarteng under the bus if the need arises. Over the weekend, she said that the decision to eliminate the top tax rate was not hers but Kwarteng’s and that he did so without discussing it with her Cabinet. Truss acknowledged that her government should have “laid the ground better” but stressed that “I do stand by the package we announced.” Tory Chairman Berry warned that any MP voting against the fiscal measures would be kicked out of the party.
The U.K. has a quiet week in terms of data. Final September manufacturing PMI will be reported Monday. Final September services and composite PMI readings will be reported Wednesday. The economy is already sliding into recession; while the government’s supply side experiment may give a short-term boost to growth, it will come at a huge cost and will likely end in tears. Market expectations for BOE tightening have eased in recent days on the hopes that the fiscal plan will be reversed but that seems unlikely, at least for now. WIRP suggests a 125 bp hike is nearly priced in vs. 150 bp last week, while the swaps market is pricing in a peak policy rate near 5.75% vs. the cycle high near 6.25% last week.
Switzerland reports September CPI Monday. Headline is expected to pick up a tick to 3.6% y/y. If so, it would be the highest since August 1993 and further above the 2% target. The Swiss National Bank just hiked rates 75 bp to 0.5% September 22 and President Jordan said “It cannot be ruled out that further increases in the SNB policy rate will be necessary to ensure price stability over the medium term,” adding that the bank remains willing to intervene in FX markets if needed and that the strong franc plays a key role in determining inflation . Jordan also stressed that the bank could move intra-meeting if needed but the updated forecasts didn’t suggest any greater urgency to tighten. The swaps market is pricing in a peak policy rate peak near 1.25% over the next 12 months, which seems to low in light of current inflation trends.
ASIA
The Bank of Japan Q3 Tankan report comes out Monday. Large manufacturing index is expected at 11 vs. 9 in Q2, while the outlook is expected at 11 vs. 10 in Q2. The large non-manufacturing index is expected to remain steady at 13 while the outlook is expected at 15 vs. 13 in Q2. In a good sign for investment, large all-industry capex is expected at 18.9% vs. 18.6% in Q2. After a soft start in July, the data have been coming in strong in August. Consensus sees 1.6% SAAR growth in Q3 vs. 3.5% in Q2. While the slowdown doesn’t appear to severe, it’s clear policymakers are proceeding cautiously.
September Tokyo CPI will be reported Tuesday. Headline is expected to fall a tick to 2.8% y/y, while core (ex-fresh food) is expected to pick up two ticks to 2.8% y/y. If so, core would be the highest since June 2014. Of note, core ex-energy is expected to pick up two ticks to 1.6% y/y. We know that high inflation is causing some concern amongst the ruling LDP, as evidenced by reports of yet another fiscal package in the works. Ahead of that, final September manufacturing PMI will be reported Monday. Final September services and composite PMI readings will be reported Wednesday.
August cash earnings and household spending will be reported Friday. Nominal cash earnings are expected at 1.5% y/y vs. 1.3% in July, while real cash earnings are expected at -1.9% y/y vs. -1.8% in July. Spending is expected at 7.2% y/y vs. 3.4% in July. We know from various BOJ comments that the bank really wants to see a sustained rise in wages before it will contemplate an exit from stimulus, so the earnings data has taken on just as much importance as the CPI data. For now, however, the BOJ is on hold. Next policy meeting is October 27-28 and no change is expected then.
Reserve Bank of Australia meets Tuesday and is expected to hike rates 50 bp to 2.85%. However, it is by no means a done deal as WIRP suggests only 60% odds of such a move. At the last meeting September 6, it hiked rates 50 bp to 2.35%and said that “The Board is committed to returning inflation to the 2–3% range over time. It is seeking to do this while keeping the economy on an even keel. The path to achieving this balance is a narrow one and clouded in uncertainty, not least because of global developments.” The swaps market is pricing in 175 bp of tightening over the next 12 months that would see the policy rate peak near 4.10%. Since updated macro forecasts were released at the August 2 meeting, we won’t see the next update until the November 1 meeting.
Reserve Bank of New Zealand meets Wednesday and is expected to hike rates 50 bp to 3.5%. At the last meeting August 17, it hiked rates 50 bp to 3.0% and took a more hawkish tone. Updated macro forecasts and expected rate path were released then that show a more hawkish stance. The new rate path sees a year-end policy rate of 3.7% vs. 3.4% in May, followed by an end-2023 policy rate of 4.1% vs. 3.9% in May. The bank said “The committee agreed that domestic inflationary pressures had increased since May and to further bring forward the timing of OCR increases.” Just like the last meeting July 13, the bank said it was appropriate to keep raising rates “at pace.” Governor Orr said “Our view is that sitting around that 4% official cash rate level buys the monetary policy committee right now significant comfort that we would have done enough to see inflation back to our remit.” The swaps market is pricing in 175-200 bp of tightening over the next 12 months that would see the policy rate peak between 4.57-5.0%, which is well above the bank’s current expected rate path. Updated forecasts will come at the next meeting November 23.
COMMODITIES
Reports suggest OPEC+ will consider an output cut in excess of 1 mln bbl/day. The group meets in Vienna Wednesday for the first in-person gathering since March 2020. The group cut output by 100k bbl/day last month but this has done little to arrest the slide in oil prices, which last week fell to the lowest levels since January.
