Drivers for the Week Ahead

  • The dollar is likely to remain under pressure
  • With the media embargo lifted, quite a few Fed officials will speak this week; Fed manufacturing surveys for September will continue to roll out; Canada Parliament reopens Wednesday with the Trudeau government presenting its new fiscal agenda
  • EU summit begins Thursday; reports suggest the ECB has launched a review of its PEPP; eurozone and UK Markit flash PMI readings for September will be reported Wednesday
  • Riksbank meets Tuesday; Norges Bank and SNB meet Thursday
  • Japan and Australia flash PMI readings for September will be reported Wednesday; RBNZ meets Wednesday and is expected to keep rates steady at 0.25%

The dollar is likely to remain under pressure.  DXY traded Friday at the lowest level since September 10 and a break below the 92.478 area is needed to set up a test of the September 1 low near 91.746. Likewise, the euro needs to break above the $1.1910 area to set up a test of its recent high near $1.2010.  Sterling has recovered from the BOE-related selloff but is facing resistance near $1.30. The easiest route to express dollar weakness right now may be against the yen, as USD/JPY is easily making new lows for this move and is within sight of the July 31 low near 104.20. More importantly, charts point to a test of the March low near 101.20. The weak dollar trend should continue this week as we remain negative on the dollar due to the now-familiar combination of an ultra-dovish Fed and softening US economic data.

 

AMERICAS

There are a few things we know now that we didn’t know a week ago. The Fed made it clear that the strategic ambiguity in its new long run framework was deliberate. That is, the Fed has maximum discretion over policy and it means to use it to allow the economy to run hotter than it would normally would. The “lower for longer” mantra is as strong as ever. On the other hand, the US economy is losing momentum and underscores why the Fed is emphasizing its dovish credentials. We also know that efforts are being made to broker a compromise on the next stimulus package. Whether those efforts will pay off is another matter.

With the media embargo lifted, quite a few Fed officials will speak this week. Brainard speaks Monday, followed by Evans and Barkin Tuesday. Chair Powell appears before the House Financial Services Panel with Treasury Secretary Mnuchin Tuesday, appears by himself before the House Panel on Covid-19 Wednesday, and appears with Mnuchin again before the Senate Banking Committee Thursday. Mester, Evans, Rosengren, Quarles, and Daly all speak Wednesday, followed by Bullard, Evans, and Barkin Thursday and then Williams Friday.

Fed manufacturing surveys for September will continue to roll out.  Richmond Fed reports Tuesday and is expected at 12 vs. 18 in August. Kansas City Fed reports Thursday and is expected to remain steady at 14. Last week, the Empire survey came in at 17.0 vs. 6.9 expected and 3.7 in August, while the Philly Fed came in as expected at 15.0 vs. 17.2 in August.  These are the first snapshots for September and will help set the tone for other manufacturing data.  Markit flash PMI readings for September will be reported Wednesday. Manufacturing is expected at 53.3 vs. 53.1 in August, while services is expected at 54.5 vs. 55.0 in August.

Weekly jobless claims will be reported Thursday.  Initial claims are expected at 840k vs. 860k the previous week, while continuing claims are expected at 12.45 mln vs. 12.628 mln the previous week.  Adding regular and PUA initial claims shows over 1.5 mln are newly filing for unemployment every week and that’s not so good.  Similarly, regular continuing claims have stabilized around 13 mln while PUA continuing claims have stabilized around 15 mln and so the total of the two remains stuck around 28 mln and also points to trouble.  The August jobs data were solid, but the 1.371 mln jobs gain continues the sequential loss of momentum seen across most US economic indicators. Indeed, current consensus for September jobs is 865k.

Other minor data will round out the week.  August Chicago Fed National Activity Index will be reported Monday and is expected at 1.19 vs. 1.18 in July. August existing home sales will be reported Tuesday and are expected to rise 2.6% m/m vs. 24.7% in July.   August new home sales will be reported Thursday and are expected to fall -1.2% m/m vs. +13.9% in July. August durable goods orders will be reported Friday and are expected to rise 1.1% m/m vs. 11.4% in July.

Canada Parliament reopens Wednesday with the Trudeau government presenting its new fiscal agenda. We suspect an aggressive plan will be unveiled, as the debate led to the resignation of the more cautious Finance Minister Morneau. He was replaced by Chrystia Freeland, someone thought to be more in line with Prime Minister Trudeau’s push for a more active fiscal policy. The need for more stimulus is clear, with real economic data last week showing a broad-based loss of momentum and headline inflation steady at 0.1% y/y. The Bank of Canada is on hold for now and is likely hoping that the government will deliver a big slug of stimulus this week.

 

EUROPE/MIDDLE EAST/AFRICA

The EU summit begins Thursday. The 2-day in-person meeting will be held in Brussels and will cover a variety of important topics. Of course, the most important one will be the state of the Brexit negotiations. Other reports suggest the EU is considering sweeping new powers to crack down on US tech giants. The regulatory measures could include massive financial penalties or even shutting them out of the EU market altogether. This battle has been brewing for years.

Reports suggest the ECB has launched a review of its Pandemic Emergency Purchase Program. It was launched in March at EUR750 bln and was increased to EUR1.35 trln in June. The review will reportedly determine how long it should continue and whether its flexibility should be extended to the bank’s other support programs. At this juncture, we think it inconceivable that the bank is trying to determine whether or when to wind PEEP down. Rather, the internal debate is likely centering around expansion and extension. The next meeting is October 29. However, if the ECB were to add more stimulus as we expect, it would most likely come at the December 10 meeting, when new macro projections will be released.

Eurozone Markit flash PMI readings for September will be reported Wednesday. Manufacturing is expected at 51.9 vs. 51.7 in August, services is expected to remain steady at 50.5, and the composite is expected at 51.7 vs. 51.9 in August. Looking at the country breakdown, French manufacturing is expected at 50.6 vs. 49.8 in August, services is expected to remain steady at 51.5, and the composite is expected at 51.9 vs. 51.6 in August. German manufacturing is expected at 52.5 vs. 52.2 in August, services is expected at 52.9 vs. 52.5 in August, and the composite is expected at 54.0 vs. 54.4 in August. The regional data are expected to show some softness from the impact of the viral resurgence, something that the ECB is well aware of.

UK Markit flash PMI readings for September will be reported Wednesday. Manufacturing is expected at 54.0 vs. 55.2 in August, services is expected at 55.8 vs. 58.8 in August, and the composite is expected at 55.5 vs. 59.1 in August. After that, August public sector net borrowing will be reported Thursday. CBI releases the results of its September industrial trends survey Tuesday, followed by its distributive trades survey Thursday. While recent data have been solid, it’s clear that the UK economy is facing headwinds at we move into Q4.

The Bank of England delivered a very dovish hold last week and is clearly contemplating further stimulus. The entire UK gilt curve out to seven years remains negative, while rates markets are pricing in negative rates in Q1 2021. We still believe negative rates are unlikely but acknowledge that the risk of such an outcome are rising. Our call remains for another boost to QE before year-end coupled with a 10 bp cut in the policy rate to zero in early 2021. That cut could be moved up if a no deal Brexit starts to crystallize.

Riksbank meets Tuesday and is expected to keep policy unchanged. It is too soon to expect further stimulus since at its last meeting July 1, the bank surprised markets with an expansion of QE whilst keeping rates on hold at zero.  It expanded its purchase program to SEK500 bln from SEK300 bln, extended it to mid-2021, and added corporate debt to its program beginning this month. The bank’s flat rate path was extended to at least the beginning of 2023 after being kept flat for only one year out at its April meeting due to the uncertain situation.  Since that meeting, the real sector data have come in firm while inflation has ticked up, suggesting the bank remains on hold this week.

Norges Bank meets Thursday and is expected to keep rates at zero. However, inflation figures surprised on the upside in August, supporting the possibility of another adjustment to the Norges Bank’s rate path. Headline CPI came in at 1.7% y/y, while core inflation accelerated a couple ticks to 3.7% y/y.  This was the highest since July 2016 and moves further above the 2% target.  The increase was in part due to higher import prices, as well as energy prices and household items.  At its last meeting August 20, Norges Bank noted the improved pace of the economic recovery. This means that the bank could reign in its dovish language this week about keeping rates at current levels “over the next couple of years” and perhaps adjust its rate path modestly.  At the June 18 meeting, the bank adjusted its expected rate path to show the policy rate rising to 0.5% in 2023 from 0% currently.

Swiss National Bank meets Thursday and is expected to keep rates steady at -0.75%. At its last meeting June 18, the bank warned that it would intervene in the FX market “more strongly” as Governor Jordan again called the Swiss franc “highly valued.” Since that meeting, the real sector data have been solid and deflationary pressures have eased a bit. New economic forecasts will be issued. In June, GDP was expected to contract -6% this year and deflation expected to persist through next year.  Whilst Jordan said the bank is always looking for further policy steps if needed, we do not think the bank will go more negative and expect policymakers to continue focusing on the exchange rate with its ongoing intervention program.

 

ASIA

Japan Markit flash PMI readings for September will be reported Wednesday. August convenience store sales will also be reported Wednesday, followed by August department store sales Thursday and supermarket sales Friday. The economy continues to underperform and deflationary pressures are picking up. However, the BOJ is on hold for now and we think the next slug of stimulus will come from the fiscal side as incoming Prime Minister Suga tries to make a strong statement that Abenomics will continue.

Australia flash PMI readings for September will be reported Wednesday. Preliminary August retail sales will also be reported Wednesday, followed by preliminary August trade data Friday. August jobs data were stronger than expected and should support consumption. So far, the economy has been weathering the impact of the Victoria lockdown fairly well, but there are clear downside risks if the viral numbers rise again.

Reserve Bank of New Zealand meets Wednesday and is expected to keep rates steady at 0.25%. At the last meeting, the bank unexpectedly increased its QE and so it’s too soon to expect another move this week. However, speculation is growing that the RBNZ will take rates negative. WIRP is pricing in chances of a negative policy rate by April, and this has helped push down the Kiwi curve so that the 2- to 5-year portion is currently negative. August trade data will be reported Thursday.