Inflation data from the US and China combined with FOMC meeting minutes will dominate otherwise quiet week ahead of us. Over the weekend Hamas has launched surprise attack on Israel killing many innocent civilians, oil and gold should spike on market open. Please be mindful that increased volatility can be seen during the week.
USD
ISM manufacturing PMI in the month of September printed 49, up from 47.8 in August. The number is still below expansion level of 50, it has been there for eleven months, but positives are abound in this reading. Production rose to 52.5 and employment jumped back into expansion with 51.2 which is the highest reading since May. New orders and new export orders both improved with former coming at 49.2, close to the 50 level. Finally, prices paid component continued to decline and printed 43.8 vs 48.4 in August.
ISM services PMI for the month of September came in at 53.6 as expected, down from 54.5 in August. There was a big drop in new orders index, but it is still holding nicely in expansion. Employment index also fell, but by smaller amount. New export orders index continued to improve and is now sitting at 63.7 while backlog of orders posted a huge jump and almost returned into expansion. Prices paid component remained unchanged at 58.9 which is a concern considering inflation pressures coming in from the services sector.
Headline NFP number in September blew the roof off expectations. It came in at 336k while 170k was expected. There was no changes in the unemployment rate and participation rate (3.8% and 62.8% respectively). Average hourly earnings came in at 0.2% m/m, unchanged from August reading, but a tad weaker than 0.3% m/m as was expected while yearly figure slid to 4.2% from 4.3% the previous month. Chances of a November rate hike jumped after the report.
The yield on a 10y Treasury started the week and year at around 4.58%, rose to 4.89% and finished the week at around 4.78%. The yield on 2y Treasury reached the high of 5.21%. Spread between 2y and 10y Treasuries started the week at -48bp then tightened to -26bp as bear steepening of the curve continues. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at November meeting at around 30% while probability of no change is at around 70%.
This week we will have September meeting minutes and inflation data. Headline inflation is expected to tick up on the back of rising oil prices while core inflation is expected to continue declining toward the 4% level.
Important news for USD:
Wednesday:
FOMC Minutes
Thursday:
CPI
EUR
Final Eurozone manufacturing PMI for September was unchanged at 43.4 with German reading being revised down and French reading being revised up. Output and employment components are declining. Demand for manufactured goods is on the decline. August unemployment rate came in at 6.4% y/y as expected and ticked down from 6.5% y/y in July. Final services for the Eurozone improved to 48.7 on the back of improvements across the board while German and Spain services readings returned into expansion. Composite reading improved to 47.2.
ECB Vice President de Guindos stated that it is premature to talk about rate cuts. ECB Chief Economist Philip Lane stated that service inflation is a big contributor to the overall number and that getting inflation down to 2% will not be as quick as getting it down to 4%. He added the key is to keep rates at current level for as long as needed and that they are data dependent. As yields on 10y bonds are rising rapidly around the world, yield on 10y German Bunds reached 3% level for the first time since 2011.
GBP
Final manufacturing PMI for the month of September showed a slightly bigger bounce from August low (44.3 vs 43). New orders, output and employment components recorded declines as weak demand for manufactured goods prevail. Due to declines in demand input prices are falling which will have positive impact on high inflation. The report shows that combination of lower costs and higher selling prices led to higher corporate margins. Services printed 49.3, much better than preliminary reported, but still down from 49.5 in August. There was a drop in new orders and employment categories but input costs rose at a slowest pace in almost two-and-a-half years. Composite printed 48.5, a tick down from 48.6 the previous month. BOE policymaker Broadbent stated that it is still up to debate whether there will be more rate hikes.
AUD
RBA has decided to leave the cash rate unchanged at 4.1% as was widely expected. This was the first meeting led by new Governor Michele Bullock. Inflation has passed its peak but remain elevated due to services and rents, central projection is for it to return to 2-3% targeted range by late 2025. Growth in first quarter was stronger than expected, but still below trend as is expected to continue. Uncertainties around growth remain significant. The statement concludes with “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks. In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labor market.” A hawkish sounding message at the end, but markets continued to sell AUD.
Over the weekend Chinese PMI data were published and in the official data we can see manufacturing returning to expansion territory with 50.2 print while services PMI moved further into expansion with a 51.7 reading thus pushing composite to 52. Caixin PMI data missed expectations and dropped further with manufacturing printing 50.6 vs 51 in August while services recorded a bigger drop to 50.2 from 51.8 the previous month. Composite was dragged down to 50.9 from 51.7. China will be on holiday for the entire week. JP Morgan and Nomura analysts have revised China GDP growth up stating potential incoming targeted stimulative action.
This week we will have inflation and trade balance data from China.
Important news for AUD:
Friday:
CPI (China)
Trade Balance (China)
NZD
RBNZ has left its Official Cash Rate (OCR) unchanged at 5.5% as was widely expected. Committee agreed that OCR needs to stay at restrictive level to constrain economic activity and keep inflation pressures in check. They acknowledged that Q2 growth was stronger than expected, the growth outlook remains subdued. The statement showed “There is a near-term risk that activity and inflation do not slow as much as needed.“ Inflation remains too high and Committee is determined to bring it down to 1-3% target range while maintaining maximum employment and that means that rates may need to remain at restrictive level for a more sustained period of time. Inflation is still expected to return to targeted range by the H2 of next year. The meeting and statement can be assessed as hawkish pause since there are no mention of cuts and doors are left open for additional rate hikes. The first GDT auction in October posted a great result as prices rose 4.4%. This makes it a third consecutive auction of rising dairy prices which should give Kiwi some support.
CAD
September employment report showed a strong addition of jobs to the tune of 63.8k vs 20k as expected. The unemployment rate remained at 5.5% while expectations were for it to tick up to 5.6%. Participation rate did tick up to 65.6% from 65.5% in August. Average hourly wages also ticked up to 5.3% y/y from 5.2% y/y the previous month. Full-time employment was at 15.8k while part-time employment was at 47.9k. Rising wages, more jobs added and higher participation all lead to higher chances of additional rate hike by BoC.
JPY
BoJ Tankan report for the Q3 showed that companies expect inflation to be higher than 2% target in five years. Consumer prices are seen rising 2.5% a year from now, 2.3% annual increase three years from now and 2.1% annual increase five years from now. The report shows improvements for both big manufacturers and non-manufacturers in September and December. Firms see USDJPY averaging 135.75 for Fiscal Year (FY) 2023/24 and EURJPY averaging 144.76 for FY 2023/24.
BoJ Summary of Opinions from September meeting sent a dovish tone. The minutes show that “even if the Bank were to terminate its negative interest rate policy, this can be considered as continuation of monetary easing if real interest rates remain negative”. It was said that timing of monetary policy changes cannot be stated now as it will depend on the incoming data. This puts BoJ in data dependent mode with other central banks. The summary also shows “Consumer prices are projected to continue rising in the next fiscal year”.
US JOLTS job openings for the month of August smashed expectations and came in at 9.61m vs 8.8m as expected. This data point pushed USDJPY over the 150 level and there was a fast intervention pushing the pair all the way down to 147. There was no confirmation of intervention from Japanese authorities. The yield on a 10y JBG reached the 0.8% level on Wednesday making it the highest since 2013.
Labour cash earnings rose by 1.1% y/y in the month of August vs 1.5% y/y expected increase. When we take inflation into account we see that real wages continued to decline and fell by 2.5% y/y. Household spending declined by 2.5% y/y vs expected decline of 4.3% y/y. High inflation is impacting real wages and consequently spending and with BoJ giving much attention to the wage growth we cannot expect any significant movements toward monetary tightening until situation with wages improves. MUFG has came out with opinion that negative rates policy can be abandoned as early as January of next year, but YCC will remain in place.
CHF
SNB total sight deposits for the week of September 29 came in at CHF476.3bn vs CHF475.1bn the previous week. Continuation of increases suggests that SNB is done with buying Swissy and is now leaning toward weakening it. Headline inflation for September ticked up to 1.7% y/y from 1.6% y/y in August, but expectations were for an increase to 1.8% y/y. On the other hand, core CPI declined further to 1.3% y/y from 1.5% y/y the previous month.
