• Despite some profit-taking ahead of this past weekend, we think the path of least resistance remains that of a stronger dollar; September jobs data Friday will be the main event; Fed speakers are limited; U.S. fiscal policy remains uncertain; Canada also reports September jobs data Friday
• ECB publishes the account of its September 9 meeting Thursday; there is a full slate of ECB speakers this week and eurozone has a heavy data week; BOE publishes it Financial Policy Summary Thursday
• Japan has a busy week; August current account data Thursday will be of interest; RBA meets Tuesday and is expected to keep rates steady at 0.10%; RBNZ meets Wednesday and is expected to start the tightening cycle with a 25 bp hike to 0.5%
Despite some profit-taking ahead of this past weekend, we think the path of least resistance remains that of a stronger dollar. The same drivers that held in Q3 (hawkish Fed, energy crisis in Europe, etc.) will likely remain in play in Q4. This week, the RBNZ will likely become the second major central bank to hike rates. With the Fed likely to taper soon, tighter global liquidity in Q4 means EM and other risk assets are likely to remain under pressure. Lastly, the Evergrande saga is likely to continue weighing on China sentiment, with obvious knock-on effects for the rest of EM. China is closed on an extended holiday until Friday and we suspect policymakers are using this time to try and come up with a palatable solution to Evergrande.
September jobs data Friday will be the main event. Consensus sees NFP up 470k vs. 235k in August, with the unemployment rate is expected to fall a tick to 5.1%. Average hourly earnings are expected to rise 4.6% y/y vs. 4.3% in August. Ahead of that, ADP reports its private sector jobs data Wednesday, with consensus at 430k vs. 374k in August. ISM services PMI will be reported Tuesday and is expected at 59.9 vs. 61.7 in August. The employment component will be closely watched and stood at 53.7 in August. Last week, the manufacturing PMI employment component rose to 50.2 from 49.0 in August.
Fed speakers are limited. Bullard speaks Monday, followed by Quarles Tuesday and Mester Thursday. We believe Fed officials will continue setting the table for an official tapering announcement at the November 2-3 FOMC meeting. Much will of course depend on this week’s jobs report but we now believe that any gain larger than the 235k gain in August will be enough for the Fed to pull the trigger next month.
Other minor data fill out the week. August factory orders (1.0% m/m expected) will be reported Monday. Trade data (-$70.6 bln expected) will be reported Tuesday. September Challenger job cuts and August consumer credit ($17.5 bln expected) will be reported Thursday. August wholesale inventories and wholesale trade sales will be reported Friday.
U.S. fiscal policy remains uncertain. House Speaker Pelosi set an October 30 date for a vote on the $550 bln infrastructure bill. Basically, she has given in to the progressive wing as it appears she will now focus on getting the “human infrastructure” bill passed first, as progressives had demanded. In that regard, reports suggest the progressive Democrats are willing to compromise on the $3.5 trln proposal, though one leader flatly rejected the $1.5 trln that Senator Manchin said he would accept. Reports also suggest that some accounting tricks could be used to lower the headline number.
All parties involve are playing a risky game of chicken. As things stand, our best guess is that the Democrats agree on a figure somewhere around $2.5 trln and wrap it together with a debt ceiling increase that can be passed without any Republican support via budget reconciliation before the October 18 drop-dead data. Once that is passed, then the infrastructure bill will be passed with bipartisan support before the end of the month.
Canada also reports September jobs data Friday. Consensus sees a 60lk rise in employment vs. 90.2k in August, while the unemployment rate is seen falling two ticks to 6.9%. Ahead of that, August building permits (3.4% m/m expected) will be reported Monday, trade data (CAD330 mln surplus expected) will be reported Tuesday, and September Ivey PMI will be reported Thursday. For now, the Bank of Canada remains on hold after tapered at the last meeting in July. Many expect one last round of tapering in Q4 but the timing will depend on how the economy rebounds in H2. Next policy meeting is October 27 and no change is expected then.
The ECB publishes the account of its September 9 meeting Thursday. At that meeting, the bank delivered a hawkish hold as interest rates and the size of PEPP were left unchanged. However, the bank announced that the pace of PEPP buying in Q4 would run at “a moderately lower pace” than in past quarters. The ECB stressed that PEPP will be used “flexibly” according to market conditions. Lagarde said that the “recalibration” was for the next three months, which suggests that if the recovery falters, the PEPP pace can be recalibrated again for Q1. So, there was a little bit for everyone. We suspect this meeting was very lively as the split between the hawks and doves is widening as inflation continues to rise. Next policy meeting is October 28. While the fate of PEPP will surely be discussed then, Lagarde has tipped the December 16 meeting for a final decision on QE.
There is a full slate of ECB speakers this week. Guindos and Makhlouf speak Monday, followed by Holzmann and Lagarde Tuesday. Centeno speaks Wednesday, followed by Elderson, Lane, Holzmann, and Schnabel Thursday. Panetta speaks Friday. Of course, the hawks will focus on high inflation while the doves will focus on its (hopefully) transitory nature.
Eurozone has a heavy data week. It reports final September services and composite PMI readings Tuesday. August PPI will also be reported Tuesday and is expected to rise 13.5% y/y vs. 12.1% in July. This suggests upside risks to CPI ahead. August retail sales will be reported Wednesday and are expected to rise 0.9% m/m vs. -2.3% in July. Germany reports August factory orders Wednesday. Orders are expected to fall -2.0% m/m vs. a 3.4% gain in July. IP will be reported Thursday and is expected to fall -0.5% m/m vs. a 1.0% gain in July. Trade will be reported Friday. Exports are expected to rise 0.5% m/m vs. 0.6% gain in July, while imports are expected to rise 1.8% m/m vs. -3.6% in July.
The Bank of England publishes it Financial Policy Summary Thursday. In its July report, the Financial Policy committee (FPC) wrote that: “The FPC continues to judge that the banking sector remains resilient to outcomes for the economy that are much more severe than the Monetary Policy Committee’s central forecast. This judgement is supported by the interim results of the 2021 solvency stress test. The FPC expects banks to use all elements of their capital buffers as necessary to support the economy through the recovery. It is in banks’ collective interest to continue to support viable, productive businesses, rather than seek to defend capital ratios by cutting lending, which could have an adverse effect on the economy and, consequently, on banks’ capital ratios. To support this, the FPC expects to maintain the UK countercyclical capital buffer rate at 0% until at least December 2021.”
Next policy meeting is November 4 and believe it or not, WIRP suggest nearly 20% odds of a hike then. This seems highly unlikely to us. That said, lift-off is fully price in for Q1, followed by two more hikes over the course of 2022. This too seems highly unlikely. Yet the fact that sterling has weakened sharply even as the BOE tilts more hawkish means that the market sees a policy mistake shaping up.
Japan has a busy week. Final September services and composite PMI readings and September Tokyo CPI will be reported Tuesday. Headline is expected at -0.1% y/y vs. -0.4% in August, while core (ex-fresh food) is expected at 0.2% y/y vs. flat in August. If so, this would be the first positive reading for core since July 2020. National CPI was reported at flat y/y in August and so a positive Tokyo reading would bode well for September. That said, core inflation is expected to remain well below the 2% target until FY24 at the earliest. August leading index will be reported Wednesday. August real cash earnings and household spending will be reported Thursday. Earnings are expected to rise 0.5% y/y vs. 0.3% in July, while spending is expected to fall -1.2% y/y vs. a 0.7% gain in July.
August current account data Thursday will be of interest. An adjusted surplus of JPY1.15 trln is expected vs. JPY1.41 trln in July. However, the investment flows will be of more interest. July data showed that Japan investors were net sellers of US bonds to the tune of -JPY764 bln vs. net buying of JPY1.5 trln in June. Japan investors were also net sellers (-JPY155 bln) of Australian bonds for the third straight month and five of the past six months. Japan investors were net buyers of Canadian (JPY93 bln), and Italian (JPY376 bln) bonds, both coming off of two straight months of net selling.
Reserve Bank of Australia meets Tuesday and is expected to keep rates steady at 0.10%. At the last policy meeting September 7, the RBA started tapering but moved the next review of its QE program from November to February. Since then, nothing has happened that would warrant a change in this schedule and so this week’s meeting should be a non-event. There won’t be updated macro forecasts until the November 2 meeting. August trade data will be reported that same day. Exports are expected to fell -3% m/m vs. a 5% gain in July, while imports are expected to rise 1% m/m vs. 3% in July.
Reserve Bank of New Zealand meets Wednesday and is expected to start the tightening cycle with a 25 bp hike to 0.5%. Market expectations for a larger 50 bp hike have been tamped down by recent RBNZ comments. However, WIRP suggests subsequent 25 bp hikes are fully priced in for the November 24 and February 23 meetings. Of note, the bank’s expected rate path was updated at the last meeting August 18 to show the average OCR rising to 0.6% by end-2021, 1.6% by end-2022, 2.0% by end-2023, and 2.1% by Q3 2024, the end of the forecast period. Recall that the bank surprised markets with a hold then when a 25 bp hike was expected, which was later chalked up to “bad optics” due to recently enacted lockdowns.