- Stock market volatility will continue to be the focus for investors
- October US jobs report Friday will be the data highlight this week; ahead of that, US reports a slew of data
- BOJ meets Wednesday and BOE meets Thursday; both are expected to keep policy steady
- Brexit talks have been frozen ahead of the budget statement by Chancellor Hammond today at 330 PM local time
- Canada also reports October jobs data Friday; Australia has a busy data week
- China reports official October manufacturing PMI Wednesday and Caixin PMI Thursday
- Votes in Brazil and Mexico have many different implications for investors
The dollar is mixed against the majors as the new week begins and equity markets try to stabilize. The dollar bloc and Scandies are outperforming, while the yen and Swissie are underperforming. EM currencies are also mixed. ZAR and TRY are outperforming, while MXN and CNY are underperforming. MSCI Asia Pacific was down 0.2%, with the Nikkei falling 0.2%. MSCI EM is up 0.3% so far today, with the Shanghai Composite falling 2.2%. Euro Stoxx 600 is up 1% near midday, while US futures are pointing to a higher open. The US 10-year yield is up 1 bp at 3.08%. Commodity prices are mostly lower, with Brent oil down 0.5%, copper up 0.6%, and gold down 0.3%.
Stock market volatility will continue to be the focus for investors. The VIX remains elevated near 24%, which is just short of this month’s peak near 29%. On top of rising US interest rate and trade tensions, markets must now contend with what appears to be weaker earnings. With China, Japan, and the eurozone economies softening, the global backdrop for equities remains shaky.
October US jobs report Friday will be the data highlight this week. Consensus sees a 193k gain in nonfarm payrolls, up from +134k reading in September that was impacted by the hurricane. More importantly, average hourly earnings are expected to rise 3.1% y/y vs. 2.8% in September. This would be a cycle high and the highest since April 2009. Such a reading would feed into the notion that the Fed remains on track to tighten in December regardless of stock market gyrations.
Because of the FOMC meeting on November 8, the press embargo on Fed officials begins this week. The last scheduled appearance is by Evans today. While virtually no one expects the Fed to hike November 8, Bloomberg’s WIRP suggests markets see a 70% chance of a hike December 19. Whilst down from the peak odds north of 80% earlier this month, 70% is still quite high.
Ahead of Friday, US reports a slew of data. September personal income and spending as well as core PCE Monday. October Chicago PMI and ADP private sector jobs will be reported Wednesday, ISM and auto sales will be reported Thursday. Most readings are expected to show continued firmness in the US economy.
Bank of Japan meets Wednesday and is expected to keep policy steady. Given the uncertainty and fear gripping global financial markets, the yen has gained, and the BOJ is probably not very happy with this. Is the BOJ concerned about the drop in exports last month? Certainly. Can it do anything about the strong yen? Not really.
Ahead of the BOJ, Japan reports September labor market data Tuesday and IP Wednesday. Unemployment is expected to remain steady at 2.4%, but IP is expected to contract -2.1% y/y. Retail trade data for September was reported earlier today.
Bank of England meets Thursday and is expected to keep rates steady at 0.75%. Implied yields on short sterling futures contracts have fallen significantly in recent weeks. Market is not fully pricing in the next hike until September 2019, rather than by March as recently as October 10. The combination of soft economic data and continued Brexit uncertainty are the major factors at work here.
Ahead of the BOE decision, Markit reports UK manufacturing PMI, which is expected to ease to 53.0 from 53.8 in September. Construction PMI will be reported Friday, with services and composite PMI coming out next Monday.
Brexit talks have been frozen ahead of the budget statement by Chancellor Hammond today at 330 PM local time. Hammond has the unenviable task of presenting a budget not knowing what will happen with Brexit. As such, we would not put too much weight on what is contained in the budget. Much of it could be torn up if there is a messy no-deal Brexit.
Australia has a busy data week. It reports Q3 CPI Wednesday, with headline inflation expected to ease to 1.9% y/y from 2.1% in Q2. However, trimmed mean inflation is expected to remain steady at 1.9% y/y. September trade will be reported Thursday, where a AUD1.7 bln surplus is expected. Lastly, September retail sales will be reported Friday. All in all, the data should confirm the notion that the RBA is in no hurry to hike rates. Next policy meeting is November 5, no change is expected as market expectations are currently centered on Q4 2019 as the start of the tightening cycle.
Canada also reports October jobs data Friday. Employment is expected to rise 12.5k vs. 63.3k in September. However, the breakdown is expected to be solid, with full-time jobs seen up 20k and reversing last month’s -16.9k reading. BOC delivered a hawkish hike last week, signaling further tightening ahead.
China reports official October manufacturing PMI Wednesday, which is expected at 50.6 vs. 50.8 in September. Caixin reports its China manufacturing PMI Thursday, which is expected to remain steady at 50. Policymakers are clearly concerned about the slowing economy and so further stimulus measures are likely if softness continues in Q4. We would not read too much into the likelihood that USD/CNY will break above 7, as it would come within the context of broad-based EM weakness.
We are likely to see some further knee-jerk buying of Brazilian assets after Bolsonaro’s second round victory. However, we remain skeptical that he will deliver what markets are expecting. COPOM meets Wednesday and is expected to keep rates steady at 6.5%. Markets now see little risk of a hike until 2019.
The other big EM vote was the 4-day nationwide “consultation” in Mexico regarding the new airport under construction. Nearly 70% voted for the incoming AMLO administration to scrap the $13 bln project. However, some believe it could cost $10 bln to cancel it. It would also have implications for payments on bonds issued to finance the project. If nothing else, cancellation would call into question the rule of law in doing business in Mexico. Quite frankly, this is a stark reminder that markets still face lots of risk with AMLO. One can also draw the same conclusion about Bolsonaro.