Drivers for the Week Ahead

  • Virus numbers are rising across Europe and now the US; for now, the dollar is benefitting from generalized risk-off sentiment
  • Politics will be front and center this week in the US; all eyes will also be on Capitol Hill; there is a full slate of Fed speakers this week
  • The US data highlight will be September jobs data Friday; US manufacturing readings for September will continue  to roll out; weekly jobless claims will be reported Thursday
  • The final scheduled round of Brexit talks begin Monday in Brussels; eurozone CPI readings for September come out this week; final eurozone September manufacturing PMI readings will be reported Thursday
  • Japan has a busy data week; Australia reports August retail sales Friday

Virus numbers are rising across Europe and now the US. Fed Chair Powell has been clear in his assessment that there can be no sustainable recovery in the US until the virus is under control. We are nowhere near that and the economic data here are likely to continue softening. That is dollar-negative. Period. Observers may note that the rising numbers in Europe are also a headwind. They are, but those nations have shown an ability to push the curve down, whereas the US has not.

For now, the dollar is benefitting from generalized risk-off sentiment.  DXY traded last week at the highest level since July 24 near 94.742.  The next retracement objectives from the June-September drop come in near 94.774 (50%) and 95.489 (62%).  The equivalent objectives for the euro come in near $1.16 and $1.15.  Cable found support at the 200-day moving average near $1.2720 but Brexit risks are high and a break below would set up a test of the June 29 low near $1.2250.  We continue to view this dollar bounce as a positioning adjustment rather than a trend change.  The broad-based weak dollar trend should eventually resume as we remain negative on the dollar due to the now-familiar combination of an ultra-dovish Fed and softening US economic data.

 

AMERICAS

Politics will be front and center this week in the US. The first presidential debate will take place Tuesday at Case Western University in Cleveland. The two candidates will meet face to face for a 90-minute debate moderated by Chris Wallace. It’s too early to say how reports of Trump’s leaked tax returns will play out but it only adds fuel to the volatility trade. While the dollar has benefitted this past week from broad risk-off sentiment, can it continue to do so when the source of so much market risk is emanating from the US?

All eyes will also be on Capitol Hill. Last week, reports emerged of a potential restart of talks on a stimulus bill. Yet we would caution against over-optimism, as the two sides remain as far apart as ever. House Democrats will reportedly stake out a $2.4 trln starting point, while Senate Republicans have yet to move from their last package of around $500 bln. The Problem Solvers Caucus tried to split the difference at $1.5 trln but their plan got nowhere.

There is a full slate of Fed speakers. Mester kicks things off Monday, followed by Williams, Harker, Clarida, and Quarles Tuesday. Kashkari and Bowman speak Wednesday, followed by Williams and Bowman Thursday. Harker wraps things up Friday. We expect all the officials to take a very cautious tone and continue pressing for more fiscal stimulus. Fed officials are likely to be quizzed about the recent spread widening in both high yield and investment grade debt, which tends to tighten monetary conditions. Powell last week sounded unconcerned as the Fed may view this as markets simply functioning normally during risk-off periods.

The US data highlight will be September jobs data Friday. This one takes on particular significance as it is the last jobs report before the election. Consensus sees 850k jobs added vs. 1.371 mln in August, while the unemployment rate is seen falling a couple of ticks to 8.2%. If so, the jobs data would continue the sequential loss of momentum seen across most US economic indicators.  Average hourly earnings are expected to rise a tick to 4.8% y/y, but this holds little meaning when tens of millions are still out of work. Ahead of that, ADP provides its private sector jobs number Wednesday, with consensus at 630k. Claims data for the BLS survey week containing the 12th of the month were mixed, with initial claims falling and continuing claims rising.

US manufacturing readings for September will continue  to roll out.  Dallas Fed reports Monday and is expected at 9.5 vs. 8.0 in August. So far, the regional Fed surveys have held up fairly well. Chicago PMI will be reported Wednesday and is expected at 52.0 vs. 51.2 in August. ISM manufacturing will be reported Thursday and is expected to rise three ticks to 56.3. September auto sales will also be reported Thursday and are expected to improve to a 15.60 mln annualized pace from 15.19 mln in August. If so, they would be the highest since February.

Weekly jobless claims will be reported Thursday.  Initial claims are expected at 850k vs. 870k the previous week, while continuing claims are expected at 12.25 mln vs. 12.58 mln the previous week.  Adding regular and PUA initial claims shows about 1.5 mln are still filing for unemployment every week and that’s not so good.  Elsewhere, regular continuing claims have stabilized around 13 mln but PUA continuing claims have started to fall and so the total of the two has dropped to around 24 mln from over 28 mln previously but still points to a soft labor market.

Other minor data will round out the week.  August advance good trade (-$81.8 bln expected), wholesale (-0.1% m/m expected) and retail inventories, September Conference Board consumer confidence (90.0 expected) will all be reported Tuesday. Another Q2 GDP revision will be seen Wednesday along with August pending home sales (3.0% m/m expected). September Challenger job cuts, August personal income and spending (-2.5% m/m and +0.8% m/m expected, respectively), core PCE (1.4% y/y expected) , and construction spending (0.7% m/m expected) will be reported Thursday. Friday sees final Michigan consumer sentiment and August factory orders (1.0% m/m expected) .

 

EUROPE/MIDDLE EAST/AFRICA

The final scheduled round of Brexit talks begin Monday in Brussels. A senior UK official said late last week that “There remains a lot of work to do and either outcome is still possible. We are now in the final period of negotiations.” The official admitted that “In particular, the differences on fisheries and the level playing field remain significant.” On the other hand, it’s constructive that the EU has agreed not to allow their opposition to the so-called Internal Market Bill distract from reaching a Brexit deal. The EU has given the UK until the end of this month to withdraw it so its negotiating stance will be tested in the days to come.

Eurozone CPI readings for September come out this week. Germany reports on Tuesday, with headline inflation expected to remain steady at 0.0% y/y, while the EU Harmonized measure is expected to show deflation remaining steady at -0.1% y/y. Spain also reports Tuesday (-0.4% y/y expected), followed by France (0.2% y/y expected) and Italy (-0.4% y/y expected) Wednesday. Eurozone CPI will be reported Friday and deflation is expected to remain steady at -0.2% y/y while core inflation is expected to remain steady at a very low 0.4% y/y.

Final eurozone September manufacturing PMI readings will be reported Thursday. Spain and Italy are expected to improve from August to 50.5 and 53.5, respectively. While the preliminary manufacturing readings were solid, the services readings were much worse than anticipated and dragged the composite reading down 50.1 and thereby signaling downside risks ahead. Final services and composite PMIs will be reported next week. August retail sales data will start to trickle out, with Spain reporting Tuesday followed by Germany Wednesday (0.4% m/m expected).

 

ASIA

Japan has a busy data week. September Tokyo CPI will be reported Tuesday, with headline expected to fall a couple of ticks to 0.1% y/y and ex-fresh food expected to remain steady at -0.3% y/y. August retail sales (2.0% m/m expected), IP (1.2% m/m expected), housing starts (-10.1% y/y expected), construction orders, and July vehicle production will all be reported Wednesday. Bank of Japan releases its quarterly Tankan report Thursday. Large manufacturing index is seen improving to -23 from -34 in Q2, while the large non- manufacturing index is seen improving to -9 from -17 in Q2. Capex is expected to rose 0.5% vs. 3.2% in Q2. Friday sees August labor market data (3.0% unemployment expected) and September consumer confidence (30.0 expected).

Australia reports August retail sales Friday. Sales are expected to fall -4.2% m/m vs. +3.2% in July. If so, this would be unchanged from the preliminary reading but we see downside risks here. While much of the weakness in the preliminary data was concentrated in Victoria (-12.6% m/m) due to the lockdown, sales ex-Victoria still fell -1.5% m/m.  August jobs data were stronger than expected and should have supported consumption.  Unfortunately, the sales data suggests there are still downside risks to the economy.  Indeed, a major Aussie bank moved up its call for an RBA cut to the next meeting October 6 while WIRP suggests nearly 75% odds of a cut then.