Drivers for the Week Ahead

  • We are beginning to become more constructive on EM
  • The Brexit situation remains fluid but it appears that our base case of another delay is coming to fruition
  • The US economic outlook still remains solid; Canada holds national elections Monday
  • ECB, Norges Bank, and Riksbank meet Thursday and are expected to stand pat: Turkey meets Thursday and is expected to cut rates
  • Bank Indonesia meets Thursday and is expected to cut rates 25 bp to 5.0%

Market sentiment remains positive as tail risks appear to be subsiding.  While there is still some Brexit uncertainty, the risks of a hard Brexit have fallen even as US-China tensions are easing.  We expect markets to remain volatile but as long as market sentiment remains on the upswing, the dollar will remain vulnerable.  DXY broke a major retracement objective and its 200-day moving average, setting up a test of the June low near 95.843.

We are beginning to become more constructive on EM.  The main trigger for some optimism is the shifting US-China dynamic.  In our view, the partial trade deal reveals weakness on the part of the US.  Reports suggest China will begin pushing for all existing tariffs to be dropped as part of Phase 2, which would be very positive for EM.  That is still likely months away but this shifting dynamic bears watching.  We will be putting out a longer MarketView piece on this topic this week.

The Brexit situation remains fluid but it appears that our base case of another delay is coming to fruition.  UK Parliament held a special session Saturday and voted 322-306 in favor of the Letwin Amendment, which requires Prime Minister Johnson to request an extension until January 31.  Yet Johnson is still aiming to pass his plan and House of Commons leader Rees-Mogg announced that there will be a debate Monday on a section of the withdrawal bill.  While the government activated “Operation Yellowhammer” to begin preparations for a hard Brexit, it seems that the odds of such an event have fallen sharply in favor of either a deal or a delay.



Fed manufacturing surveys for October continue to roll out this week.  Richmond Fed will be reported Tuesday and is expected at -7 vs. -9 in September.  Kansas City is next on Thursday and is expected at -4 vs. -2 in September.  Thursday also sees preliminary Markit PMI readings, with manufacturing expected to fall several ticks to 50.8 and services expected to rise a tick to 51.0.  Last week, Empire survey came in at 4 vs. 1 expected and Philly Fed survey came in at 5.6 vs. 7.6 expected.

The media embargo ahead of the October 30 FOMC has gone into effect and so there are no Fed speakers this week.  WRP suggests 88% odds of a cut then, the high for the cycle.  We are not entirely convinced it will cut again but if it does, the Fed will then likely remain on hold until stronger evidence of a significant slowdown emerges.

The US economic outlook still remains solid.  The Atlanta Fed’s GDPNow model is still tracking 1.8% SAAR growth in Q3, which is still near trend (~2%) with some drop-off from 2.0% in Q2.  Elsewhere, the NY Fed’s Nowcast model is tracking 1.94% SAAR growth in Q3 vs. 2.03% last week while its forecast for Q4 growth is tracking 1.05% SAAR vs. 1.30% last week.  The Q4 reading continues to edge lower as September data surprised on the weak side.

The US 3-month to 10-year curve now at +10 bp.  If sustained, this move to positive slope will significantly push down perceived recession risk.  It’s worth noting that the rise in bond yields is a global phenomenon in recent weeks, reflecting lower global recession risks.

Canada holds national elections Monday.  Please see our recent piece “Canada Election Preview: Trudeau Weathers Brownface Scandal” for an in-depth look.  Polls suggest a close race between the Conservatives and the Liberals.  While likely falling short of winning an absolute majority, the Liberals appear to have the best chance of forming the next government.  Firmer oil prices and firm data should keep CAD as an outperformer.  For USD/CAD, the July low near 1.3015 is the next big target.



The ECB meets Thursday and is widely expected to stand pat at Draghi’s last meeting.  Lagarde takes over November 1 and she will chair her first meeting December 12.  WIRP suggests 21% odds of easing then, rising to 42% in Q1 and 52% in Q2.  Flash eurozone October PMI readings will be reported Thursday ahead of the ECB decision.  Composite PMI is expected to rise to 50.4 form 50.1 in September, with both manufacturing and services readings expected to improve.

Norges Bank meets Thursday and is widely expected to keep rates steady at 1.5%.  The bank just hiked rates 25 bp last month but presented a flatter rate path that suggests only slight risks of another hike in this cycle.  Still, its relatively high carry and firmer oil prices should also help NOK start to outperform more in the coming days.     

Riksbank meets Thursday and is widely expected to keep rates steady at -0.25%.  The bank last hiked 25 bp last December and surveys suggest little risk of another hike until 2021.  September retail sales and PPI will be reported at the same time as the Riksbank decision.

Turkey central bank meets Thursday and is expected to cut rates 100 bp to 15.5%.  However, expectations range from no cut to cuts of 50, 75,100, 125, 150, 200, and 225 bp.  Inflation fell to 9.3% y/y in September, which should allow the bank to cut rates aggressively again.  It has already cut twice for a total of 750 bp and we look for a larger than consensus cut of 250 bp to 14.0% this week.



Japan reports September trade Monday.  Exports are expected to contract -3.6% y/y and imports by 2.8% y/y.  September department store and supermarket sales will be reports Thursday, along with preliminary October PMI readings.  September CPI rose only 0.2% y/y, further below the 2% target.  Local press reports the BOJ may cut its current inflation forecasts for FY19/20 at its upcoming October 31 meeting.  WIRP now shows only 38% odds of a cut then, down from nearly 100% earlier this month.

Bank Indonesia meets Thursday and is expected to cut rates 25 bp to 5.0%.  September CPI rose 3.4% y/y, just below the midpoint of the 2.5-4.5% target range.  President Joko Widodo was sworn in for a second and final term this weekend and announced a cabinet shuffle, as expected.  He urged to overhaul laws to encourage investment and job creation in order to rid his nation of poverty.