Drivers for the Week Ahead

  • This is one of the most eventful weeks for the markets in recent memory
  • Election day is Tuesday in the US; the two-day FOMC meeting concludes with a likely dovish hold Thursday; October jobs data Friday will be the data highlight
  • BOE meets Thursday and is expected to increase its asset purchases by GBP100 bln; Brexit talks continue this week and reports suggest a compromise on fisheries is taking shape; eurozone reports some key data; ECB delivered a dovish hold last week; Norges Bank is expected to keep policy unchanged Thursday
  • Japan has a light week; last week, the BOJ kept all policy settings unchanged, as expected; RBA meets Tuesday and is expected to cut both the cash rate and the 3-year yield target 15 bp to 0.10%; Australia has a busy data week too

This is one of the most eventful weeks for the markets in recent memory. US elections, an FOMC meeting, and October jobs data will likely ensure that markets remain volatile. The election outcome will probably be the biggest driver near-term for risk assets, with rising virus numbers and widening lockdowns seen as the next biggest. While we believe the base case is for a Blue Wave that helps risk assets, the 2016 election showed that tail risk can sometimes happen, leaving a lot of scar tissue. Yet looking through the noise, we must reiterate what we perceive to be the true signals. To us, that includes (but is not limited to) limited potential for US fiscal stimulus until 2021, an ultra-dovish Fed, a softening US economic outlook, and rising virus numbers that are leading to lockdowns globally. These main drivers still support our weak dollar call extending well into Q1.

 

AMERICAS

Election day is Tuesday in the US. However, given the huge amount of mail-in ballots this year due to the pandemic, results may not be known for several days, if not weeks. The best case scenario for the markets is a unified government, with a Blue Wave preferable to a Red Wave due to the higher probability of aggressive fiscal stimulus. A split government (with Democratic president and Republican Senate or vice versa) would suggest continued deadlock and low probability of meaningful fiscal stimulus. That said, we think the absolute worst outcome is a contested election in which the results are not known for weeks and is ultimately decided by the courts. Markets hate uncertainty and this is the most uncertain outcome of them all.

The two-day FOMC meeting concludes with a likely dovish hold Thursday. Policy settings will be kept unchanged even as Chair Powell will likely play up the downside risks to the economy due to rising virus numbers and the lack of another fiscal stimulus package. Until the virus is controlled in the US, any measures the Fed might take now would be akin to pushing on a string. While Powell and company will likely pledge to do more as needed, we think it is really up to fiscal policy now. And fiscal stimulus should be seen simply as providing life support to the economy until the virus is controlled. As Chair Powell has told us time and time again, there can be no sustainable economic recovery without the virus coming under control. The dollar tends to weaken on FOMC decision days. Of the eight so far this year, DXY has weakened on seven of them.

Ahead of the weekend, the Fed announced that it was lowering the minimum loan amount for its Main Street Program to $100k from $250k previously. This isn’t the first time that the Fed has tweaked its lending and liquidity programs just days before an FOMC. The move just underscores that the Fed is not constrained by the calendar and will act whenever it sees a need. That said, we don’t think this moves the needle much in terms of stimulus.

October jobs data Friday will be the data highlight. Consensus is currently at 600k vs. 661k in September. If so, this would be the fourth month of sequentially smaller job gains. The unemployment rate is expected to drop a couple of ticks to 7.7%, while average hourly earnings are expected to drop a tick to 4.6% y/y. Ahead of that, ADP provides its private sector jobs estimate Wednesday and consensus is at 650k. Weekly initial jobless claims Thursday are expected at 735k vs. 751k previously, while continuing claims are expected at 7.35 mln vs. 7.756 mln previously.

Other key US data will also be reported. October ISM manufacturing PMI (55.8 expected) will be reported Monday, along with final Markit manufacturing PMI and September construction spending. September factory orders (1.0% m/m expected) and October auto sales (16.5 mln annualized rate expected) will be reported Tuesday. September trade, ISM services PMI (57.5 expected), and final Markit services and composite PMIs will all be reported Wednesday. Q3 nonfarm productivity and unit labor costs will be reported Thursday. September wholesale trade sales and inventories as well as consumer credit ($8.25 bln expected) will be reported Friday.

Canada also reports October jobs data Friday. Consensus sees 75k jobs added vs. 378k in September, while the unemployment rate is seen steady at 9.0%. Ahead of that, October Markit manufacturing PMI will be reported Monday. Ivey PMI, which covers the entire economy, will be reported Friday. Lower oil prices are a headwind for the economy, as are rising virus numbers. We expect significant fiscal stimulus ahead, while the BOC has signaled that it will keep its policy expansive for the foreseeable future.

 

EUROPE/MIDDLE EAST/AFRICA

Bank of England meets Thursday and is expected to increase its asset purchases by GBP100 bln. The bank will unveil new macro forecasts at this meeting and so what better time to increase its asset purchases? Like the eurozone, the UK is facing downside risks as the virus spreads and lockdowns widen. The Q4 outlook has gotten worse and this gives the BOE cover to ease again now. After this meeting, the next one is December 17. Why wait? Sterling tends to strengthen on BOE decision days. Of the eight so far this year, cable has gained on five of them. Ahead of the BOE decision, UK final October manufacturing PMI will be reported Monday, followed by final services and composite PMI readings Wednesday and construction PMI Thursday.

Brexit talks continue this week and reports suggest a compromise on fisheries is taking shape. In keeping with the spirit of a skinny deal, it appears that the proposed solution would limit EU fishing in UK waters but exact quota would be allocated at a later date. Official from both sides expressed confidence that an overarching deal could be reached by mid-month. Yet others expressed caution, noting that differences remain in other key areas such as the level playing field. Talks were held over the weekend and will continue Monday.

Eurozone reports some key data. Final October manufacturing PMI readings will be reported Monday. This will be followed by final services and composite PMI readings. September retail sales will be reported Thursday and are expected to fall -1.5% m/m vs. +4.4% in August. Country level readings so far suggest downside risks here. Germany reports September factory orders (2.0% m/m expected) Thursday, followed by IP (2.6% m/m expected) Friday.

The ECB delivered a dovish hold last week. While new macro projections won’t come until the December meeting, the ECB and Madame Lagarde warned that the eurozone economy is losing momentum faster than expected and that risks are clearly tilted to the downside. Lagarde said that all bank officials agreed that it was necessary to take action and she added that there is little doubt that the ECB will act in December. In addition, she said that the bank will look at all instruments for the December meeting. Our base case is for a EUR500-750 bln increase in its PEEP along with some tweaks to its TLTRO and PELTRO programs. Despite her comments that everything is on the table, we remain confident that the ECB will not go more negative in its policy rates.

Norges Bank is expected to keep policy unchanged Thursday. At its last meeting September 24, the bank tweaked its rate path but lacked the hawkish tone that some had expected.  The bank maintained that rates would likely remain at current levels “over the next couple of years” but the expected start of the tightening cycle was brought forwards slightly and could come as early as Q3 2022. The global outlook has become much more uncertain since that meeting, with oil prices down over 12%. That argues for no change in policy or forward guidance. Nokkie tends to strengthen on Norges Bank decision days. Of the seven so far this year, NOK has gained against EUR on four of them. The RBA will issue its quarterly Statement on Monetary Policy Friday in which it lays out new macro forecasts.

 

ASIA

Japan has a light week. Final October manufacturing PMI rose to 48.7 from 48.0 preliminary. Final services and composite PMI readings will be reported Thursday. September household spending (-10.5% y/y expected) and real cash earnings (-1.2% y/y expected) will be reported Friday. Of note, the household spending will be distorted by the high base effect from last year, when many were bringing forward purchases to avoid the consumption tax in October.

Last week, the Bank of Japan kept all policy settings unchanged, as expected. Growth forecasts for FY20, FY21, and FY22 were changed to -5.5%, +3.6%, and +1.6% from -4.7%, +3.3%, and +1.5% in July. Core inflation forecasts for FY20, FY21, and FY22 were changed to -0.6%, +0.4%, and +0.7% from -0.5%, +0.3%, and +0.7% in July. That means the 2% target for inflation ex-fresh food still won’t be reached until at least FY23. The BOJ warned that “the outlook for economic activity and prices provided in this Outlook report is extremely unclear” and could change depending on the virus numbers. The bank also said that it will decide, when necessary, to extend its emergency measures whilst maintaining its economic assessment at “severe” after upgrading it in September from “extremely severe.”

Reserve Bank of Australia meets Tuesday and is expected to cut both the cash rate and the 3-year yield target 15 bp to 0.10%. A handful of analysts see no change in policies, while the WIRP model based on futures suggests nearly 85% odds of a cut. The Aussie tends to strengthen on RBA decision days. Of the ten so far this year, AUD has gained on seven of them. The RBA will issue its quarterly Statement on Monetary Policy Friday in which it lays out new macro forecasts.

Australia has a busy data week too. September building approvals and final October manufacturing PMI will be reported Monday, followed by final services and composite PMI readings and September retail sales (-1.5% m/m expected) Wednesday. September trade will be reported Thursday, with exports expected to rise 3% m/m and imports expected to fall -1% m/m.