Week ahead, w/c 8 October

Chris Scicluna
Emily Nicol

US Treasury yields remained under upward pressure on Friday, with the 10-year yield closing at a new high of 3.23%. While non-farm payrolls rose a less-than-expected 134k in September, investors noted a chunky 87k cumulative positive revision to the prior two months, signs of a negative impact from Hurricane Florence, a decline in the U-3 unemployment rate to 49-year low of just 3.7% and a third consecutive 0.3%M/M lift in average hourly earnings. While that meant that the annual rate of earnings growth dipped slightly to 2.8%Y/Y, base effects will work in the opposite direction next month, which will likely take wage growth comfortably above 3.0%Y/Y. Predictably, higher Treasury yields weighed on Wall Street, with the S&P500 closing down 0.6%. And with European bond yields having risen in tandem and BTPs having underperformed on the Italian government’s unrealistic fiscal arithmetic, the Stoxx600 fell 0.9%.

The focus in Asia today has been on mainland China, where the market reopened following a week-long public holiday. Not surprisingly, the CSI300 has slumped – currently down about 4½% – as the market factored the prior weekend’s Chinese manufacturing PMI readings, which had driven other Asian markets sharply lower at the beginning of last week, and the broader weakening of global equity markets. The slump might have been worse had it not been for the PBoC’s weekend announcement of a further 1ppt reduction in the reserve requirement ratio for some institutions (effective 15 October), although the PBoC noted that slightly more than a third of the liquidity released by that move would be needed to repay maturing medium-term lending facilities. Japan’s markets were closed for the Health/Sports Day public holiday today. Elsewhere in Asia investors took their lead from Friday’s Wall Street losses, with the Hang Seng down 1.2%, the TAIEX down 0.6%, and Australia’s ASX200 down.

Meanwhile, in Europe this morning, with Italy's key government figures over the weekend making it clear that they are in no mood to compromise with the Commission over their reckless fiscal plans, BTPs are again underperforming, with 10Y Italian spreads over Bunds up 9bps to 294bps. And, with some downbeat German IP data (see below) to add to the mix, perhaps inevitably, euro area equities are following the Asian trend, with the Eurostoxx 50  down 0.4% so far and the Borsa Italia down 1.1%.

With Japan’s market closed for a public holiday there were no economic reports released today. Over the coming week, the main focus will be on tomorrow’s Economy Watchers survey for September and Wednesday’s machinery orders report for August (recall that core private machinery orders rose a sturdy 13.9%Y/Y in July). The BoJ’s latest goods PPI and bank lending reports are released on Thursday followed by METI’s Tertiary Industry Activity Index on Friday. The Cabinet Office Synthetic Consumption Index for August should also be released at some point during the week, providing a more accurate steer on how private consumption spending is shaping up in Q3. In the bond market, the MoF will auction 30-year JGBs on Thursday.

Euro area:
The main event in the euro area this week will be the publication on Thursday of the ECB’s account from the 13 September Governing Council meeting, when the reduction in the rate of net asset purchases from the start of October was confirmed and the staff forecasts for GDP growth and core inflation were nudged lower. The account might just provide further insight into the monetary policy debate, but the post-meeting press conference was largely uneventful. And while (with all the market talk being of a future ‘operation twist’) any commentary on prospects for possible shifts in reinvestment policy will be watched, we do not expect any substantive news in this respect.

Data-wise, it will be relatively quiet for top-tier economic releases, with the most noteworthy being euro area industrial production figures for August on Friday. While we might we see some reversal of the weakness in the previous two months, output is still likely to be down on a year earlier in August. And given the recent weakening trend in manufacturing surveys, we expect production in that sub-sector to remain subdued. Indeed, this morning’s data from Germany provided another downside surprise, with total IP falling for the third consecutive month and by 0.3%M/M. Manufacturing output fell 0.1%M/M, due principally to a decline of 0.7%M/M in capital goods production. And while energy production rose 1.3%M/M, construction output fell a steeper-than-expected 1.8%M/M.  The data leave German production clearly on track for negative growth in Q3 – the average monthly level of manufacturing output over the first two months of Q3 was 1.6% lower than in Q2, with total IP down 1.2% on the same basis despite rapid growth of 3.0% in energy production.  We expect the national numbers from France and Italy (due on Wednesday) to suggest little, if any, more momentum than in Germany.

This morning, however, also brought the Bank of France’s latest business sentiment survey for September, which brought better news than the German data. Indeed, the Bank of France survey suggested that confidence in France’s manufacturing sector was firmer at the end of the third quarter, with the relevant index rising 3pts in September to 105, its highest reading for the year so far. With the exception of the transport sector, output was strong across key subsectors and new orders increased last month too. And with services and construction activity continuing to grow rapidly, sentiment in these sectors also edged higher in September, with the respective indicators up 1pt to 103 and 105, with the former at an eight-month high. So, overall the Bank of France considered today’s survey to be consistent with GDP growth of 0.5%Q/Q in Q3, in part likely factoring positive payback for the strike-associated weakness in Q2. But with other sentiment surveys in France – including the INSEE and Markit PMIs – suggesting little, if any, improvement in conditions over the third quarter, we are less optimistic about growth that quarter, forecasting a more moderate improvement to GDP in Q3, with growth up 0.1ppt on Q2 to 0.3%Q/Q.

Among other euro area data scheduled for release this week, German trade figures are due tomorrow. The back end of the week will also see final inflation numbers for September from Germany (Friday), France and Spain (Thursday). These are expected to confirm the flash estimates which brought an upside surprise to the German EU-harmonised rate, rising 0.3ppt to 2.2%Y/Y, while the equivalent French figure unexpectedly fell 0.1ppt to 2.5%Y/Y and the Spanish number was unchanged at 2.2%Y/Y. In the markets, German will sell index-linked 2026 bonds tomorrow and 2028 bonds on Wednesday.

In terms of UK economic news, bar any breakthroughs in the Brexit negotiations, Wednesday will be the day to watch in the coming week with the usual monthly output and trade data, as well as the corresponding GDP estimate, due for release. Expectations are for a very modest increase in output from the services and industrial sectors in August, and a slight drop in construction. So, despite an anticipated deterioration in the trade deficit that month from a five-month low, the monthly estimate of GDP is forecast to have risen just 0.1%M/M. However, coming on the back of a 0.3%M/M increase in July, this would leave GDP on a 3M/3M basis unchanged at a seemingly healthy 0.6%, matching the firmest pace in a year.

Other releases this week include the BRC’s latest retail sales monitor for September tomorrow and the RICS house price survey for the same month on Thursday. In addition, the minutes from the BoE FPC’s latest meeting on 3 October will be published on Tuesday, while the latest quarterly Credit Conditions Survey will be released on Thursday.

Turning to the US, after a quiet start to the week with markets closed for the Columbus Day holiday the key reports will be Wednesday’s September PPI, followed a day later by the September CPI – reports that will probably be scrutinised even more closely by the market in light of last week’s bond sell-off. The preliminary results of the University of Michigan’s consumer survey for October will be released on Friday, alongside September import prices. In the bond market, the Treasury will auction 3- and 10-year notes on Wednesday, followed by 30-year bonds on Thursday.

The only economic report released in China today was the Caixin service sector PMI for September –somewhat delayed due to last week's public holiday. In contrast with the weakening seen in the Caixin manufacturing PMI (down 0.6pt to a sixteen-month low of 50.0) – but in common with the dichotomy between the manufacturing and service sector seen in the official PMI's – the headline services index rose 1.6pts to a 3-month high of 53.1. The detail was somewhat mixed, however. The new orders index rose 0.7pts to 52.4 but the future activity index declined 0.3pts to 58.2 and the employment index fell 2.3pts to 49.0. On the pricing side, the input prices index rose 1.3pts to 54.8 but the output prices index fell 0.7pts to a 13-month low of 49.9. Combined with information from the manufacturing sector, China’s Caixin composite output index edged up 0.1pt to 52.1 in September but the composite future output index fell 0.7pts to 56.1 (the latter just 1.0pt above this year's July low-point).

Over the remainder of the week the Chinese data focus will be on Friday’s September trade report which will provide further information on how US tariffs are impacting the Chinese economy. Information from this report will also be used by analysts to refine estimates for the following week’s Q3 GDP report. Money and credit data for September may also be released late in the week or over the weekend.

This week’s Australian economic diary kicked off with the ANZ job ads index for September, which fell 0.8%M/M. This marks the third decline registered in the last four months and means that annual growth slowed to 4.7%Y/Y from 5.1% Y/Y previously. Looking out over the remainder of the week, the NAB business survey for September will be released tomorrow, while the Westpac consumer confidence index for October will follow on Wednesday. On Friday the ABS will release housing finance data for August. In addition, the RBA will release its semi-annual Financial Stability Review, which will likely continue to espouse a very sanguine – even favourable – view regarding the gradual decline in home prices seen this year.

New Zealand:
There were no economic reports released in New Zealand today. The first important indicator this week is Wednesday’s Electronic Card Transactions survey for September, which measures non-cash spending in the retail sector. On Thursday the September Food Price Index will help analysts finalise their estimates ahead of next Tuesday’s Q3 CPI report. The September manufacturing PMI will be released on Friday while the REINZ housing report for September may also be released late in the week.

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