- The dollar finally got some traction after the FOMC decision Wednesday
- US September jobs report Friday will be the data highlight of the week
- US-Canada trade talks stretched into the weekend and resulted in a last-minute deal
- Eurozone final September PMI readings will be reported this week; UK also reports its PMIs
- Reserve Bank of Australia meets Tuesday and is widely expected to keep rates steady at 1.50%
- China is closed all this week for holiday; the central banks of India and Mexico meet
The dollar is mixed against the majors as the new week begins. Nokkie and Loonie are outperforming, while the yen and Swissie are underperforming. EM currencies are mixed too. TRY and MXN are outperforming, while INR and SGD are underperforming. MSCI Asia Pacific was down 0.2%, with the Nikkei rising 0.5%. MSCI EM is up 0.1% so far today, with China on holiday all week. Euro Stoxx 600 is up 0.4% near midday, while US futures are pointing to a higher open. The 10-year US yield is up 3 bp at 3.09%. Commodity prices are mixed, with Brent oil up 0.4%, copper down 0.3%, and gold down 0.4%.
The dollar finally got some traction after the FOMC decision Wednesday. For whatever reason, the major currencies took the brunt of the dollar’s rebound, with every currency down last week except for CAD (+0.1%). EM FX was mixed last week, with TRY, RUB, and ZAR able to carve out gains even as ARS and CZK fell. China is closed all this week and so we may not see any trade-related headlines. However, China reported softer than expected PMI readings over the weekend that should keep markets nervous.
US September jobs report Friday will be the data highlight of the week. Consensus sees 185k for nonfarm payrolls, slightly lower than 201k reported in August. Average hourly earnings are seen slowing to 2.8% y/y from the cyclical peak of 2.9% in August. Ahead of Friday, ADP will report its estimate for private sector job growth on Wednesday. With a December hike largely priced in, the data are unlikely to have much near-term impact on Fed policy.
With the FOMC in the rearview mirror, the media embargo has ended and Fed officials are fanning out all over the country this week. Bostic, Kashkari, and Rosengren speak Monday. On Tuesday, Quarles testifies before the Senate Banking Committee and Powell speaks at the NABE conference. Evans, Barkin, Brainard, Mester, and Powell all speak Wednesday. Quarles speaks again Thursday, as does Bostic on Friday. We do not expect any of these Fed officials to deviate much from the script. That script still calls for a hike in December three in 2019, and one in 2020.
Canada will report September jobs data Friday too. Consensus sees a gain of 32.8k jobs that partially offsets the -51.6k reading in August. Note that last month’s headline drop was misleading, as -92k in part-time jobs masked a 40.4k gain in full-time jobs. Ahead of that, September Ivey PMI will be reported Thursday, which stood at 61.9 in August. Bank of Canada meets October 24 and is widely expected to hike rates 25 bp to 1.75% after the recent run of firm economic data.
Firm August GDP data (2.4% y/y) helped CAD outperform on Friday. The Loonie posted a sharp reversal that day and is trading at its firmest level since May near CAD1.28. It broke below the 200-day moving average today and is on track to test the April low near CAD1.2530.
US-Canada trade talks stretched into the weekend and resulted in a last-minute deal. This means that the three signatories of the original NAFTA will remain in the updated version. It appears that the last major sticking point over dispute panels was resolved in Canada’s favor. While the number of dispute settlement systems was reduced from three to two, those remaining two were basically kept unchanged. On the other hand, the US obtained expanded access to Canada’s dairy market.
It’s a quiet week for Japan. The only major data release is the Q3 Tankan Survey, which was released overnight. Large manufacturing index was 19 vs. 22 expected, declining for the third straight quarter. Large manufacturing outlook was 19 vs. 20 expected and 21 in Q2, while large all-industry capex plans were 13.4% vs. 13.9% expected. Note small manufacturing index was 14 vs. 13 expected. USD/JPY continues its climb, trading above 114 briefly to the highest level since November. The December high near 113.75 was broken and we are looking ahead to the November high near 114.75.
Eurozone final September PMI readings will be reported this week. Final manufacturing PMIs were just reported earlier today, revised down a tick to 53.2. German and France were unchanged from the flash readings. It appears that the culprits were Italy (50.0 vs. 50.1 previously), Greece (53.6 vs. 53.9 previously), and Spain (51.4 vs. 53.0 previously). Final services and composite PMIs will be reported Wednesday. The euro dipped Friday to its lowest level since September 12. It was unable to break below that today but remains heavy. Break of $1.15 is needed to set up a test of the August low near $1.13.
Despite higher than expected German September CPI, the eurozone reading came in as expected at 2.1% y/y. Core reading slowed to 0.9% y/y, however, and ECB officials pushed back against the more hawkish perception of Draghi’s remarks last week. Villeroy speaks Monday, while Nouy, Nowotny, and de Guindos speak Thursday and Knot Friday.
The Italian drama is likely to go back to a slow simmer now that Finance Minister Tria delivered a draft budget deficit target for 2019 equal to -2.4% of GDP. Despite his failure to contain the populist tendencies of the ruling coalition, Tria vowed to stay on in his post to help maintain stability. The government must present its draft to the European Commission by mid-October for approval. One EU official who spoke on condition of anonymity said the -2.4% figure puts Italy in breach of its obligations. As that mid-October deadline approaches, we expect the slow simmer to pick up to a boil again.
The UK reports its September PMI readings this week. Manufacturing came out earlier today at 53.8 vs. 52.5 expected. Construction PMI will be reported Tuesday, followed by the services and composite readings Wednesday. Last Friday, BOE Deputy Governor Ramsden offered a dovish take on the economy, which didn’t help sterling. Other BOE officials will speak this week, including Tenreyro Monday followed by Haldane and Haskel Tuesday.
For the UK, politics will likely trump economics this week. Prime Minister May will face off against a restless Tory party at its annual conference that began Sunday in Birmingham. Her former Foreign Minister Boris Johnson has already delivered his own challenge, offering a six-point plan last week to replace her so-called Chequers Plan that was roundly rejected by the EU. Furthermore, Johnson did not rule out a leadership challenge to May. Sterling is getting dragged lower for a variety of reasons. It has retraced nearly half its August-September rally, and a break of $1.29 is needed to set up a test of the August low near $1.2660.
Reserve Bank of Australia meets Tuesday and is widely expected to keep rates steady at 1.50%. August trade will be reported Wednesday and retail sales on Thursday. With the mainland Chinese economy slowing, we believe policymakers down under will maintain a dovish stance. Consensus does not see RBA nor RBNZ hiking rates until H2 2019. AUD has retraced nearly half its September rally, and a break of 0.7175 is needed to set up a test of this month’s low near 0.7085.
Note that China is closed all this week for holiday. US-China relations remain tense even as US rates head higher, so the global backdrop for EM remains negative. Over the weekend, both official and Caixin PMI readings for September were reported and were weaker than expected. Official manufacturing PMI fell to 50.8 from 51.3 in August, while Caixin manufacturing PMI fell to 50.0 from 50.6 in August. The headline Caixin reading was the lowest since May 2017. The output component was the lowest since October 2017, while the new orders component was the lowest since June 2016.
Elsewhere in EM, the central banks of India and Mexico meet this week. The former is expected to hike because of a vulnerable rupee, while the latter is expected to keep rates steady because of a firm peso. We will also get some high September CPI readings from Turkey and the Philippines that support our call for further tightening by both central banks. Indeed, an inflation spike in Turkey to 21.1% y/y from 17.9% in August is expected, which would wipe out half of the most recent 625 bp hike in real terms.