The week ahead

Chris Scicluna
Emily Nicol

After US stocks ended last week in retreat – with the S&P500 closing down ½% on Friday on reports that Chinese trade officials had cancelled visits to farms in the Mid-West, and President Trump called the nation a threat while also rejecting the notion of a partial trade deal – most Asian stock markets have likewise started this week in reverse. While China’s Ministry of Commerce insisted on the weekend that the two sides had held constructive trade talks last week, the mixed signals on trade appeared today to weigh on Chinese stocks (the CSI300 is down 1.5%) while the Hang Seng is down 0.8% after another weekend of protests in Hong Kong.

Japanese markets, of course, were shut for a national holiday today, and so the Yen, like many currencies, were largely little changed. Nevertheless, CNH strengthened somewhat after taking a step down late Friday on the adverse trade news-flow. In contrast, sterling ha weakened ahead of the possible announcement of the outcome of the UK Supreme Court hearing on Johnson’s Parliament shutdown – which could have an impact on his ability to deliver a no-deal Brexit – and the opposition Labour party vote on whether to advocate remaining in the EU or continue to sit on the fence.

In bond markets, ahead of a busy week for Fed-speak, this morning USTs have given up some of their gains late Friday, with 10Y yields up about 3bps to close to 1.75%, still nevertheless more than 10bps below their level this time last Monday. In contrast, ahead of the flash PMIs due shortly, as well as Draghi’s final testimony to the European parliament later today, euro area govvies have made gains and periphery bonds have outperformed.

One Japanese data focus this week will be tomorrow flash PMIs for September, which might well see a further boost to services activity ahead of October’s consumption tax hike. But the headline manufacturing PMI seems likely to remain firmly in contractionary territory for the fifth consecutive month. At the end of the week, meanwhile, the September Tokyo CPI report seems likely to report a further softening of price pressures, with the BoJ forecast measure expected to drop 0.1ppt to 0.6%Y/Y, which would be a sixteen-month low. The headline and “core core” measures are also expected to move lower.

Following last week’s BoJ policy meeting, which saw Kuroda suggest a greater inclination to ease policy further, his speech to business leaders in Osaka tomorrow will be closely watched for further insight into the possible outcome of next month’s key review. In addition, Policy Board member Masai will speak on Thursday.

Euro area:
Top-tier sentiment surveys for September dominate this week’s data flow in the euro area, starting today with the flash PMIs. These are expected to suggest that the manufacturing sector contracted at a slightly softer pace at the end of the current quarter, but conditions in the services sector weakened somewhat from last month too. As such, the composite PMI is forecast to be little changed at 51.9 in September, to leave the quarterly average unchanged from Q2 and consistent with subdued GDP growth again in Q3.

The Commission’s business and consumer surveys – due Friday – arguably offer a more comprehensive guide to economic activity in the euro area. And while the latest edition is expected to show the headline economic sentiment indicator unchanged at 103.1 in September, this would leave the quarterly average at its lowest since Q215. Despite a further slowing in economic momentum, the ECB’s latest lending figures – due Thursday – are likely to show continued steady growth to businesses and households alike in August, albeit with continued big differences between the member states.

At the country level, the German ifo and French INSEE business surveys are due tomorrow. These are likely to add to evidence that German firms continue to struggle in the face of weak demand for manufactured goods while conditions in the more services-oriented French economy are more stable. Consumer confidence indicators from the largest two member states will follow on Wednesday, while Italy’s ISTAT business and consumer sentiment surveys are due Friday. That day will also bring flash inflation figures for September from France, along with consumer spending figures for August.

Beyond the data, Draghi will later today testify on monetary policy before the European Parliament for the final time as ECB President. Other ECB speakers in the coming week include Villeroy de Galhau (tomorrow), Cœuré (Wednesday), de Guindos (Friday). In the markets, Germany will sell 2Y Schatz on Tuesday and 10Y Bunds on Wednesday, while Italy will also issue fixed-rate and index-linked bonds on Wednesday.

Brexit will inevitably dominate the UK news-flow this week. But while Johnson will again cross paths with a number of EU leaders early in the week, and discussions will continue at official level, we certainly do not expect any significant breakthroughs in negotiation. Indeed, the UK proposals sent to the Commission last week were clearly unrealistic, being wholly incompatible with EU red lines with respect to avoiding border infrastructure on the island of Ireland. And submission of any meaningful proposal from the UK side seems highly unlikely, at least until next week’s Conservative Party conference has passed.

However, the ruling of the Supreme Court on Johnson’s shutdown of Parliament could come as soon as today. While the judgement cannot be predicted with confidence, on balance we think the greater likelihood is that Johnson’s action will be considered unlawful. If so, the next meeting of Parliament could be brought forward from 14 October. Moreover, the ability of Johnson to prorogue Parliament once again next month in a deliberate attempt to force through a no-deal Brexit could be curtailed. In Brighton, meanwhile, the opposition Labour Party membership will vote on whether (in line with the majority Rank-and-File view) to adopt an all-out pro-Remain stance or to adhere to the fence-sitting position advocated by leader Corbyn.

With respect to economic data, like in the euro area, the coming week will bring a number of September sentiment surveys from the UK, kicking off today with the CBI industrial trends gauge of manufacturing sector conditions. While risks of a no-deal Brexit at the end of October reduced somewhat last month, this survey is likely to signal ongoing going weakness in sector, with further falls in output and orders at the end of Q3. The equivalent retail sector survey – due Wednesday – might suggest a subdued level of sales. However, we note that recent official sales data have been stronger than surveys have implied. The GfK consumer confidence survey, due on Friday, is nevertheless likely to suggest that sentiment among households remains relatively weak. Other data due in the coming week include August public finance data (tomorrow), which are likely to show an increase in net borrowing from a year ago, not least on account of an increase in Brexit-related public spending. UK Finance bank lending data are due Wednesday.

BoE speakers include MPC member Tenreyro, who will discuss inflation dynamics in a speech in Frankfurt today. Governor Carney and Deputy Governor Cunliffe will also speak publicly in Frankfurt on Thursday, although their focus will be financial services. MPC Saunders will give a speech in Yorkshire on Friday. In the bond markets, the DMO will sell 30Y linkers on Tuesday.

Data-wise in the US, the first half of the week will be dominated by sentiment and housing market figures, beginning today with the release of the Chicago Fed national activity index for August and flash Markit PMIs for September. Tomorrow will bring the Conference Board’s latest consumer confidence survey, along with the FHFA and Case-Shiller home price indices for July, which will be followed by August new and existing home sales figures on Wednesday and Thursday respectively. Final Q2 GDP numbers – also to be published on Thursday – are likely to confirm annualised growth of 2.0%Q/Q, while advance goods trade and inventories figures for August will be closely watched for economic momentum in Q3. Finally, Friday will see the release of preliminary durable goods orders data for August, along with personal income and spending numbers for the same month, including the monthly deflators.

In addition, against the backdrop of a split FOMC, several Committee members are scheduled to speak publicly this week. Today NY Fed President John Williams will speak at a conference on the UST market, and St Louis Fed President James Bullard (who last week voted for a 50bps rate cut) will speak on the economy and monetary policy. Other Fed speakers scheduled over coming days include Charles Evans, Chicago Fed President and FOMC voting member in 2019, tomorrow. And FOMC Vice-Chair Clarida will give an update of the Fed’s review of its monetary policy strategy, tools, and communication practices on Thursday. In the markets, the US Treasury will sell 2Y notes tomorrow, 2Y floating-rate and 5Y fixed-rate notes on Wednesday and 7Y notes on Thursday. And given last week’s money market pressures, the New York Fed will continue to hold overnight and term repo operations to try to keep the federal funds rate within the target range.

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